Multi-Family | 2022 Market Overview
After two years of historical performance, multifamily real estate is moderating a bit, with rent growth slightly dipping in Q3 2022. Although shifting, national rent growth is still at a record high of 5.6 percent. Apartment demand is matching 2020 levels as interest rates are rising and mortgage payments become too expensive for many potential homeowners. The need for more affordable housing is stretching the 1- and 2-Star units thin, keeping the subsector’s vacancy low, while luxury 4- and 5-Star units are seeing vacancy rates rise in many markets. Overall, the multifamily sector is experiencing change, but steady rent growth and rising interest rates are playing in the market’s favor.
The multifamily sector is one of the most resilient asset classes in commercial real estate. Demand has slightly lowered but many markets are still seeing a need for mid-priced housing. National rent growth is strong, and investors are yearning to place capital into the market.
Rents/Vacancy
The national vacancy rate for multifamily is 6.1 percent as of December 2022, a 1.2 percent increase year-over-year. The increase is a bit misleading though, as the large majority of vacancies is driven by the luxury market. Moderately-priced tertiary markets’ vacancy rates have remained below the national average. In addition, in-demand markets like Los Angeles and Chicago are seeing vacancy rates between 3.5 percent and 4.6 percent. Rent growth remains impressive even with an overwhelming amount of supply entering the market, with the average asking rent price per unit at $1,610. Once again, Midwest and gateway markets are stabilizing national rent growth as other markets experience a decrease.
Construction
The multifamily pipeline saw over 400,000 units delivered in 2022. The urgent demand for apartments created during the pandemic pushed developers to break ground as quickly as possible, but supply chain shortages and a tight labor market caused a large gap between planned and completed projects. Now, as demand has slowed, projected deliveries across the U.S. for 2023 are 494,000 units, the highest amount since 1986. Most of the projects underway are deeply concreted in the Sunbelt, but many investors believe the Midwest and Northeast markets that saw less demand and growth from 2020 to 2022 will lead the nation in demand and rent growth in 2023. Overall, luxury apartments continue to take precedence in the development pipeline, but high-end construction will fall off as four- and five-star facilities cater to a very narrow pool of renters that will dry up.
The multifamily pipeline saw over 400,000 units delivered in 2022.
Sales
Once again, multifamily was the chosen asset class for most investors, ranking first for transaction activity among the four major real estate sectors. The market brought in over $53B in sales volume in Q3 2022, with the average sale price per unit reaching $259,000. Even in a shifting marketplace, investors see multifamily rent growth as its strongest indicator of future performance. Rising interest rates have narrowed the buyer pool as financing becomes harder to secure. REITs are the best option for sellers during high-interest-rate periods, as the institutions often don’t need outside lending for larger acquisitions such as apartment complexes.
Trends
Consumers fled to suburbia and secondary markets after the onset of COVID-19 looking for more space and affordability. This migration skyrocketed rent growth and demand in regions like the Sun Belt, bringing investors along with it. Now, metropolises such as New York, Chicago, and Los Angeles are gaining momentum back, reporting stronger rent growth and lower vacancy compared to previous quarters.
Younger generations are driving the development of open-air complexes and multi-use apartment buildings. In 2022, 72 live.work.play. properties were completed, providing flexible work space, local retailers, and amenity-packed apartment units. 2023 is set for success with a pipeline set to deliver more than 2022’s record. New York City, Seattle, and Philadelphia are some of the top markets for mixed-use investments.
Market Outlook
The multifamily sector is one of the most resilient asset classes in commercial real estate. Demand has slightly lowered but many markets are still seeing a need for mid-priced housing. National rent growth is strong, and investors are yearning to place capital into the market.
In Texas, according to a Houston Business Journal published on January 12, 2023, Multifamily real estate has been on a roll, and we believe that roll will continue for years to come. Families and businesses continue to be drawn to the state due to its abundant energy, including renewables, business-friendly state and local governments, and state-of-the-art and affordable state university and college system.
Several factors have fueled notable demand volumes in Texas. This state has benefited from sizable domestic migration, and corporate relocations have led to some of the fastest-growing economies as well, which is especially true in Austin and the Dallas/Fort Worth metroplex. Economic and population growth coupled with favorable demographics have set the stage for demand tailwinds in the Lone Star State.
Taking a closer look at multifamily real estate investment growth in Texas with regard to multifamily real estate, unit supply growth has been very strong but demand has been even stronger. According to Realpage Analytics:
“The existing unit count in the state of Texas has grown by 140,000 new apartments over the past two years, which increased the state’s existing inventory base by roughly 6%. While new supply volumes have been incredibly high, however, Texas demand is even better. Remarkable levels of absorption in the state resulted in total demand of roughly 190,000 units in the past two years. That works out to about 8% more occupied units today than at the start of 2020.”
Interested in buying, selling or investing in retail property in Texas? Visit Lumicre’s Retail and Alternative Investments Group page for Texas retail brokerage sales advisory.