Multifamily: Navigating Challenges and Seizing Opportunities
The multifamily sector, like other commercial properties, faces challenges such as rising mortgage rates, increasing expenses, and a surge in supply. However, its outlook remains more positive, thanks to enduring demand drivers. While post-pandemic demand has slowed, absorption rates remain robust, and occupancy rates, though down, still outperform historical averages.
Strong Fundamentals Amid Challenges
Despite declining occupancy rates attributed to increased supply, multifamily housing benefits from long-term demand. The government-sponsored enterprises (GSEs) provide a liquidity backbone, and although transaction volume has reduced due to pricing uncertainties, investor demand remains.
Growing Demand and Changing Dynamics
Record levels of apartment absorption in recent years are fueled by factors such as job market recovery, rising income, and remote work trends. The surge in household formation and a shift towards suburban living contribute to this unprecedented windfall. While rent growth decelerates, factors like low unemployment and wage growth support household finances.
Market Variances
Differences in market performance emerge, with slower rent growth in Sun Belt markets experiencing high supply growth. Coastal markets like New York and Boston benefit from consistent demand and returning office workers. In contrast, some Western markets face negative rent growth due to slowing demand, safety concerns, and regulatory challenges.
Higher Rates and Industry Impact
Higher mortgage rates impact multifamily property values, leading to a 70% reduction in transaction activity. Values have declined, and the MSCI CPPI suggests a further 10% drop might restore normalcy. The impact extends to refinancing challenges, with many owners facing equity shortfalls.
Meeting the Housing Demand Challenge
The U.S. is grappling with a severe housing shortage, with a report by Up for Growth indicating a need for millions of additional units. Housing underproduction in 2021 affected 193 metro areas, worsening in 83% of the 256 markets studied. Factors like population growth, suburbanization, and evolving demographics emphasize the crucial need for more multifamily housing.
Focus on the Future
Despite short-term challenges, the multifamily sector maintains a positive long-term outlook. Negative trends in some markets are outweighed by the sector’s resilience, with rents increasing substantially over the past decade. The enduring housing shortage in the U.S. positions multifamily as a vital player in meeting the nation’s housing needs.
Author: Alex Navarro
Reference: PwC