The country’s multifamily real estate is taking some lumps this year after a record 2021, prompting questions about what the new year will look like from all corners of the industry.
High inflation hit renters harder than homeowners with fixed-rate mortgages this year than any time since at least 2000, according to analysis by Chanden Economics, a commercial real estate data services firm. And the Federal Reserve made matching last year’s record multifamily investment sales nearly impossible when it started raising rates at a record pace, sending lending costs soaring as construction loans have become more difficult to find.
Though inflation appears to be slowing, talk of a recession in the new year persists. Here’s what some multifamily industry executives are predicting for 2023:
Yisroel Berg, chief investment officer for multifamily with Norfolk, Virginia-based Harbor Group International
“Going into 2023, we see increased opportunity in high-quality multifamily assets in major markets across the U.S. Following the outsized rent growth in recent years, we anticipate a rent deceleration, and with ongoing market volatility, we are focused on investing in higher quality markets. We see opportunity to acquire new multifamily developments, including those that are in the very early stages of lease up, to capitalize on the buying opportunity for more modern, top-tier product.”
Brad Case, chief economist for Northern Virginia-based Middleburg Communities
“2023 will see sizable deliveries of new rental housing units, especially in areas with the most appealing market conditions such as Austin, Texas. That’ll put pressure on occupancy rates, and it’ll also continue the softening of rent growth that started in the last half of 2022. But we think that surge in deliveries will be confined mostly to 2023. Whether labor market conditions will weaken is still very much an open question. If labor markets continue to be strong, then we expect to see a rebound in household formation, increasing new demand for rental housing, whereas if labor markets weaken then we expect resident retention to remain healthy but to be pressured by new supply.”
Adam Kaufman, co-founder and chief operating officer at New York-based crowdfunding firm ArborCrowd
“Come the New Year, uncertainty from the past several months will likely start to decrease as distress becomes more apparent, creating compelling investment opportunities for those who are well capitalized and have experience operating during downturns. Those who paid inflated prices for properties throughout the pandemic and didn’t properly underwrite for slowing rent growth will face issues as their debt matures, requiring them to either utilize their own cash reserves to put capital back into their buildings, bring in partners or sell their assets — especially those with floating-rate debt with expiring interest rate caps that are costly to replace. On the flip side, those who were patient and responsible over the past three years and had the expertise to underwrite for an eventual downturn will survive, because the fundamentals of their investments remain strong.”
Jennifer Rosenberg, development director at Philadelphia-based Keystone Development + Investment
“The multifamily sector will continue to be a resilient asset class in 2023. For developers, this means higher demand in a market that poses numerous challenges — from lingering supply chain delays to inflation to labor shortages. These challenges will require multifamily developers to get creative with their means of acquiring materials, incorporating the newest and best technology, and creating a community in which renters can feel involved.”
Alex Horn, principal at Miami-based lender BridgeInvest
“The escalating cost of debt and insurance has muted profitability for multifamily properties across the board, resulting in the erosion of values over the last two quarters. Despite current market conditions, multifamily still remains the darling asset class of investors and lenders alike and should have the most access to capital of any asset class in 2023. The credit underwriting bar will be higher than in years past, creating a market of haves and have-nots. The successful multifamily projects will be able to access cost-effective financing solutions, while the more pioneering projects will see significant expansions in their cost of financing.”
Steve Rappin, president of Chicago-based Evergreen Real Estate Group
“We have noticed a shift toward the YIMBY [yes in my backyard] movement, which means greater public acceptance of affordable projects and an awareness of housing equity. The public is starting to realize how difficult it is for lower-income residents to find homes near their places of employment and are more willing to discuss this need and consider new housing options” and will gain momentum in the new year.
Matthew A. Rieger, president and CEO of Miami-based Housing Trust Group
“2023 is going to be one of the most challenging years on record for the affordable housing industry. We’re facing the unprecedented triple threat of high inflation, high interest rates and skyrocketing property insurance costs. We were recently told to expect to pay two to three times what we’re paying now for property insurance. Since affordable housing developers are capped on income, an increase of this magnitude makes it practically impossible for new developments to pencil out. Florida Housing Finance Corp. officials have thankfully created an emergency fund called the Construction Housing Inflation Response Program, which is helping cover most of the financing gap on transactions underwritten in 2020-2021. But in other states that aren’t as proactive, new developments are not closing and this is especially concerning since we already face a tremendous shortage of affordable housing supply.”
Diego Bonet, managing partner of Miami-based developer Lineaire Group
“Wellness components, technological connectivity and elevated amenities will continue to hold popularity in 2023. Gone is the business center. Instead, we’re meeting the growing demand of people prioritizing and maximizing coworking spaces that are effective, artistic and interactive. We’re seeing a rise in hospitality-oriented multifamily that incorporate apartment residences and a hotel flag in one mixed-use setting, such as at our $200 million project in Tampa, Florida, and combining 10 floors of a hotel below multifamily residences in West Palm Beach. This further elevates the living experience beyond on-site amenities with hotel conveniences right at your fingertips.”