2023 Apartment Outlook: Cycle Test

In neighborhoods across Chicago, concessions are starting to take hold. After several years of meteoric rent growth—from the downtown high-rises to midtown podium walk-ups to the single-family-for-rent outer rings, the fourth quarter of 2022 witnessed a full stop to one of the best net operating income and asset value growth cycles the Windy City has seen in decades.

“Fundamentals basically fell off a cliff on Labor Day,” says Mike Zucker, who launched Peak Properties in 1998 and has since grown the portfolio to 8,000 units under management with a 15% ownership interest. “We have all kinds of properties, and demand has always been different across the market, but rent just cannot grow to the sky. No matter what kind of asset or neighborhood, we’re definitely entering an era of concessions.”

Indeed, from the Midwest to the Southeast to Texas and the core-plus metropolitan statistical areas on the coasts, 2023 will more than likely mark the beginning of the end of historic rent growth in multifamily. While incremental rent gains are to be expected from shrewd operators and hotter markets this year, signs of a cycle apogee abound, and cycle-tested apartment owners and managers expect a turning point likely to reward long-hold investors with fixed-rate financing and a tight grip on expenses.

In Phoenix, transactions and construction stalled in late 2022 as developers eyed year-over-year depression in effective rent growth and exposure to thousands of units of new deliveries across 2023 and into 2024. After strategically transitioning to a mostly Class A portfolio of 22,000 units under management, of which 5,000 are owned, Scottsdale, Arizona-based Mark-Taylor Residential will use the balance of this year to focus on securing occupancy and stockpiling land for future development.

“The market moved swiftly,” says Mark-Taylor president John Carlson. “At the end of the second quarter last year you could still get your whisper price and close quickly on dispositions. Within 90 days we were seeing guys pull deals off the market, we were seeing retrades, and the institutional and private equity investors went pencils down. As a development group, we were in our last two deals after being active since 2011 but have pulled the parachute and will look to bank our land for the long term.”

Emblematic of apartment markets from coast to coast, Phoenix saw its best operational year on record in 2021, with 20.5% effective rent growth providing strong tailwinds into the first half of 2022 and fueling continued interest from scores of investors eager for immediate cash flow and the promise of can’t-lose arbitrage, particularly from value-add opportunities. “Our investor DNA is as diverse as ever. From institutional and life companies all the way to mom-and-pop, everyone checked green on Phoenix multifamily,” Carlson says. “But in 2021 you had everyone here, and I mean everyone. Groups of investors we’ve never seen before on the tour sheets, obscure groups in late cycle behavior.”