Multifamily Fundamentals Return to Historical Norms

Nothing about the last business cycle has been normal. A global pandemic, a prolonged zero or near-zero federal funds rate and a decade of outsized rent growth nationwide have skewed multifamily investors’ perception of normal market dynamics. This year, it is officially time to take away the punchbowl. Markets are normalizing, with an expectation of higher long-term interest rates—the Fed increased rates again by 25 basis points at the March meeting—and steady growth metrics.

Arthur Milston, senior managing director at NAI Global, and John Rutherford, SVP of investment sales at NAI Hallmark, say multifamily investors are in for an adjustment period, which has already manifested through buyer-seller gaps in pricing and a dramatic decrease in acquisition activity. However, multifamily continues to perform with positive rent growth and strong demand fundamentals, illustrating positive long-term prospects for the asset class.

The Era of Normalized Growth

After several years of double-digit rent increases, market growth is returning to a normal range. In 2023, national multifamily rents are up 5.5%, occupancy is above 95% and there remains a housing shortage in the country. All of these dynamics point to a steady and measured investment.

“If you compare it to where we were pre-COVID and some of the supply-demand constraints that contributed to rising inflation, I would say that we are even higher than we were pre-pandemic in terms of metrics like rent growth,” Rutherford said.

Of course, we’re also seeing normalized market metrics due to higher interest rates. The recent prolonged period of low interest rates is an anomaly by historical standards. Multifamily investors are going to have to adapt, and that might be difficult. “We are in a stabilization process,” explains Rutherford. “There are going to be some ramifications from that, but the market will start to stabilize as time goes on.”