Multifamily Fundamentals to Normalize in 2023

By Christine Serlin

Fundamentals for the multifamily industry are expected to remain strong for 2023 but are normalizing to pre-pandemic levels and in line with the national historic average.

“Given the recent turbulence in the capital markets, investment transaction activity is anemic and fundamentals are moderating. With interest rates increasing, things are tempering a bit,” says Dori Nolan, senior vice president of institutional client services at Berkadia. “While we expect fundamentals to remain strong and stable, we think the investor demand will pick up in the second half of 2023. But, we’re seeing cap rates increase as a result of what’s happening in the debt markets. Many investors today want to acquire assets with positive leverage. We believe there needs to be more clarity around pricing for more investors to move off the sidelines. With cap rates going up and pricing moderating, that’s going to provide the confidence and ballast for investors to start investing again.”

As part of Berkadia’s 2023 National Forecast and Market Reports, Nolan says the outlook factors in that the multifamily industry will face some sort of recessionary pressures in the coming year.

“The multifamily sector has performed well in recessionary times. It’s proven to be a resilient asset class,” Nolan says. “In terms of looking at this sector compared with others, we expect multifamily to be a strong performer and an important asset class for a diverse base of investors.”

Berkadia forecasts that multifamily construction will swell in the coming year, with approximately 565,200 units scheduled to come online by year’s end; this is the highest annual deliveries in over two decades. Sun Belt markets are expected to see expanded apartment development, led by Dallas-Fort Worth, Phoenix, and Austin, Texas.

“We have seen a lot of construction activity, and that’s really related to the increasing and growing demand for housing,” Nolan says. “We are undersupplied as a nation. We still need to deliver 4.3 million new units by 2035 to meet demand. This year, we are projecting that we’ll see 565,000 new deliveries. The absorption looks strong with over 403,000 units of net absorption projected; however, we do expect to see more deliveries than absorptions.”

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