Freddie Mac Outlook: Slow and Steady

A graph measuring employment growth, alongside the national vacancy rate and gross income growth. Chart and data courtesy of Freddy Mac and Moody’s Analytics

Data and analysis of fundamentals from Freddie Mac’s 2023 Midyear Multifamily Outlook shows a multifamily sector that is slowly beginning to revert to pre-pandemic seasonal norms, despite latent economic headwinds that are expected to persist for the rest of the year. Consequently, predictions for a recession were less severe. Data cited by the report showed a 17 percent decline in the probability of a recession.

The sector is struggling with persistently high interest rates, depressed transaction volumes and loan originations, as well as wider bid-ask spreads and lower property values. Still, the sector’s longer-term outlook is positive, with high demand for all asset classes nationwide, large construction pipelines in Sun Belt markets, steadily declining inflation and a healthy job market are all positive trends.

Findings and fundamentals

Predictions for a recession – a motivator for many lending and borrowing sentiments in the industry – were muted in the report. Freddie Mac cited data from Moody’s Analytics that forecasts a 33 percent chance of a recession for the remainder of the year, down from 50 percent. For its part, the Federal Reserve is no longer predicting a recession, but still expects its repeated rate hikes to send further waves of uncertainty throughout the economy, with two more Consumer Price Index and jobs reports expected before the organization’s meeting in September.

Headline inflation, one of the biggest hindrances to deal making and development, has been reduced significantly from June 2022’s peak of 9 percent, but still remains “comparatively high,” according to the report, while core inflation growth remains “persistently high” at 4.8 percent. For its part, the Moody’s data predicts that inflation growth will trend downwards, totaling 2.2 percent in 2024.

The report sees a recession in 2024 as a “coin flip”, with government action that has been designed to reduce inflation having the opposite effect. Here, the report identified “missteps” by the Federal Reserve, the government once again reaching its debt limit, an abrupt resumption of student loan payments, further banking instability and geopolitical strife as the primary catalysts for a downturn.

Still, these changes would have to be both rapid and destabilizing, according to the report, in part due to a strong job market, with wage growth increasing 5.6 percent, alongside a labor force participation rate increasing by 40 basis points to 62.6 percent, as of June. “Despite the overall slowing of the economy, dour sentiment and expectations levels, the labor market is still performing comparatively well,” the report said.

If a recession does occur, Freddie Mac expects it to be mild, comparing a potential recession to those in 1991 and 2002. “If a recession does occur, we believe multifamily performance would likely be in a similar range,” the report said.

Multifamily outlook: a mixed bag

Falling rent growth, alongside declines in occupancy at the end of 2022 into this year have contributed to an “inflection point” for multifamily, one where both metrics were predicted to increase substantially. The increases were only moderate, in part due to drop-offs in demand attributable to declines in household formations. Overall, the nation’s occupancy rate was lower than both last years’ and the long-term average, with a mean decline of 217 basis points year-over-year through May, according to Freddie Mac’s internal data.

Additionally, rent growth has remained sluggish in markets such as Phoenix, Las Vegas and Sacramento that previously enjoyed nationwide highs and have since declined steeply. The current metrics are a far cry from those of last year,  Here, Class A assets saw the greatest increases, averaging out at 2.9 percent, while Classes B and C measured out at 2 and 2.4 percent respectively. According to the report, the primary culprit is an inflation rate that, while easing, is still leading to elevated expenses.