With apartment rent growth remaining high at the midpoint of 2022 and continued tight market availability, the multifamily sector is well positioned for the second half of 2022, according to a new report from Freddie Mac. However, there are headwinds appearing.

“In 2022 we expect every market we cover to experience gross income gains,” the report said. “Florida and the Southwest markets are generally expected to outperform the nation while the smaller markets in the Midwest, along with a few large markets, are generally expected to be among the comparatively weaker performers.”

One reason is the impact of inflation and increased mortgage rates meeting strong demand from Millennials. “[T]he median price of a home has increased $110,000, or more than 38%, since first quarter 2020,” Freddie Mac notes. “Meanwhile, mortgage rates are up 160 bps from early 2020 and up nearly 250 bps from the low seen in the fourth quarter of 2020. The combination of extreme home price appreciation and higher interest rates has made the monthly principal and interest costs jump $842, a 67.3% increase from first quarter 2020.” High prices are pushing many to remain in the rental market as they are priced out of buying.

Freddie Mac expects vacancy rates to stay flat at 4.8% and fundamentals to continue strong with a full year total income growth of 6.8%.

“These forecasts are based on the current economic trajectory holding steady throughout the rest of the year,” the organization says. “In our current forecast, the labor market remains stable and the multifamily market continues to perform well, with both vacancy and income growth more favorable than long-run averages.”

The move of renters to the South and West—where markets have been smaller, rents lower, and increased business activity attractive to job seekers—will continue. But even gateway cities that faced tough conditions during the pandemic are seeing “strong rent growth” so far this year, and that is likely to continue. 

During the second half of the year, Freddie Mac also estimates that vacancy rates will decrease compared to 2021 in 60% of the markets it follows.

But there are headwinds in the form of pressures on cap rates and valuations. Rising interest rates increase financing costs. “The 10-year Treasury rate averaged 1.94% during the first quarter of 2022,” says the report. “In the second quarter, it is up about 100 bps. It is then reasonable to expect upward pressure on cap rates to follow.”

But cap rates had continued to compress this year and they resemble some previous historical environments. “Using this historical period as a guide, cap rates could be expected to increase moderately for the rest of 2022, but the severity is not expected to be as volatile as the Treasury rate movements given historic context,” Freddie Mac says.

Then there are prices. “Given the robust rental growth already this year and the continued healthy growth expected for the rest of the year, we anticipate price appreciation to continue for the remainder of 2022, albeit at a much more modest pace,” says the report.