After Years of High Performance, Multifamily Steps Back in 2023

The cost of capital is rising. Rent growth is cooling. Pockets of the country could soon be facing a potential short-term oversupply of new apartment units. There are several forces in play to raise unemployment with the aim of reducing inflation.

Leading executives addressed these and other headwinds during a recent panel at the National Multifamily Housing Council (NMHC) Apartment Strategies Conference in Las Vegas.

While there was cause to celebrate for much of the past few years, operators’ moods are expected to retract a bit in 2023.

Steven DeFrancis, CEO, Cortland, said that rent peaked in summer and fell off in fall and winter and has stabilized and occupancy remains strong.

“We saw 12 great years of transactions, then it came to a halt,” he said.

Helen Garrahy, senior vice president, Portfolio Management, Heitman, called her company’s recent performance, “better than we’d expect at this time of the year. There will be rent pressure, but we have a bit to ‘give’ after the past few years.

“Transactions are slow. There are buyers and sellers, but what’s in between them is a chasm of price expectations for the first half of the year.

Jackson Lapin, managing director, asset management, Invesco, said it was a challenging year to budget for, trying to determine where the industry as a whole is going to balance out.

“There will be bumpy roads over the next 18 months, late into 2024,” he said. “Bid-ask spread is large right now. Watching the yield curve, where does it normalize how long does it take to get there?”

Suzanne Mulvee, senior vice president, chief strategy officer, GID, said about a looming recession, “The seeds have been sown. It now just has to show up. The Fed cannot accomplish what it said it needs to without a recession.

“For us, stop looking at the consumer price index. Look at the job market. That’s what matters. Wage growth data all point to 5% to 6% wage growth. That is double what is normal. The Fed said it needs to get to a 4.5 to 5% unemployment rate before it feels its mission is accomplished. That is two million in job losses.”

Added Garrahy, “Reduction in consumer confidence is coming in some form this year.”

‘Stickier’ Residents Favorable to Multifamily

Said DeFrancis, “Whatever we end up with this year – a soft landing, a recession – there’s definitely going to be some pain because we have a lot of product coming and not a lot of people to put in there.

“But we are still bullish long-term. As a country, we are underbuilt in housing. We are making up for it quickly.”

He said when investing, the next two years are going to be about finding promising submarkets.

Garrahy also expects “short-term pain,” but “we’re in a better position because we have the cushion. Stickier renters and demographics are in our favor. Renters like transience and wanderlust, so that keeps them in our realm longer.

She said that the single-family is overbuilding and now, with mortgage rates rising, there are no starter homes available.

“We do have a habit of overbuilding in these situations, and we’ll see it again. [Then again], we are the beneficiaries of other sectors’ troubles (like office) when it comes to the percentage of investment allocation.”

‘A Good Year to Be an Investor’

Mulvee said this is a good year to be an investor.

“Pricing adjustment is happening in real-time,” she said. “The desire to deal is strong but the ability to do so is hamstrung. But it won’t be impossible.

“Even while Fed was hiking rates, we had the second-best year for transaction volume ever. In Q4, we even did $40 billion in deals. More deals got done than it felt like happened. Seven percent of apartment inventory traded – the same rate that occurred during the Great Financial Crisis. You are going to see a bit more transactions than you think, and the investors will be the winners.”

Lapin said in Q4 his company did half of the dealmaking it did in each of the previous three quarters.

“That pace will remain,” he said. “Odyssey funds are testing the waters in multifamily. It’s not a normal mix of assets that are available. People are putting their least favorite asset out there to see what happens, and if they aren’t getting what they want, they pull it back.”

He called the next year or so “lumpy.”

“Capital is there, but people are cautious because of the uncertainty,” Lapin said. “What is an appropriate discount? We’re trying to put some metrics to that. We look for opportunities. We have the capital. But we don’t want to make a mistake, so there is tension.”

Garrahy said there is capital out there, “but both sides have to capitulate with a cavern of expectations. We see about two more quarters of the ride down. Capital is out there that might be thinking it’s there to “save the day,” but we don’t need that now.”

DeSantis said there’s more private capital out there than in recent years because it didn’t want to compete with the institutional investors. Private capital becomes a wild card because it could be more eager to play.

“Values have fallen by 15, 20, 25 percent, and replacement costs aren’t coming down,” he said. “It feels like there is a better chance at another leg down than the values coming up. Not that the 25% discount we’re seeing isn’t a great number, but it might get to 35% by the end of the year, so there’s no urgency to deal now.