Berkadia Sees Multifamily Normalize to Pre-Pandemic Levels

In its semi-annual survey of internal investment sales advisors and mortgage bankers, Berkadia found expectations that multifamily fundamentals would remain strong while returning to pre-pandemic levels, wide variation in market expectations by geographic region, and a lot of turbulence coming.

“Despite market uncertainty, the multifamily industry shows resilience,” the report said was a common perspective. But they don’t expect a continuation of the pricing power that existed through a significant portion of last year.

Only 30% of respondents expected apartment supply to outpace renter demand in 2023, which 59% said no and 11% were unsure. That alone should keep a rental pricing collapse from happening. However, 67% of respondents, when asked about cap rates, expected them to climb this year; 25% said they’d remain the same and 8% expected lower values. Nationally, most investors are underwriting cap exit rates 25 to 50 basis points higher than going cap rates. But in the mid-Atlantic, southwest, and Rocky Mountain regions, the exit increases over current cap rates are up 50 to 75 basis points.

Lower cap rates had been justified by higher expectations of rent growth that would lead to larger net operating income levels. That no longer seems the case, at least in how investors are underwriting. More than half (51%) reportedly are seeing 2% to 3% growth, with another 15% expecting 1% to 2% and a tenth looking for flat to negative growth. Without higher rent increases, it becomes difficult to impossible to financially justify higher property prices.

And keeping property prices up becomes significantly harder when distressed opportunities are growing. About 92% of respondents expected to see them increase this year, while only 8% didn’t.

Another aspect of multifamily obvious in the report was the differences by geographic regions. “From 2020 through 2022, many developers extended project deadlines due to increased construction and labor costs and shortages,” said the report. “This buildup has led to approximately 565,200 units being scheduled to come online by year-end, making 2023 the highest for annual deliveries in more than 20 years. The Rocky Mountain (50%), Mid-Atlantic (42%) and Southeast (37%) are already seeing this wave of apartment deliveries, with producers reporting a sharp increase in apartment supply.”

That goes back to the question of supply outpacing demand. The highest areas of supply are, unsurprisingly, those regions that have seen the largest influxes of residents as part of national demographic shifts.