By Christine Serlin
Despite weakening fundamentals, capital markets uncertainty, continued inflation, and the possibility of a recession, the multifamily sector remains resilient, according to Berkadia’s 2023 Outlook Powerhouse Poll.
The sixth annual proprietary poll, conducted in December and January, provides insights from 144 investment sales brokers and mortgage bankers across 70 of the firm’s offices. Over half of the Berkadia respondents, 54%, said they expect inflationary pressures, rising interest rates, and recession fears to extremely impact investment transaction activity this year. An additional 45% said they only expect a moderate impact on investment transactions.
In addition, over half of the respondents, 51%, also said they expect a recession to occur in the next 12 months, while 35% said they believe the nation is already in a recession.
“As real estate investors adapt strategies and investment decisions to shifting market conditions, we remain sanguine about multifamily investing, fundamentals, and operations,” said Ernie Katai, executive vice president and head of production at Berkadia. “While this shift is coupled with headwinds and economic uncertainty, this environment is nothing we haven’t conquered before, and, in fact, we believe we are reverting back to national historic averages. While we’ve seen our industry certainly be challenged over the last year and becoming more politicalized, we believe multifamily is still a desirable asset class with the potential for attractive investor returns, resiliency, and capacity to withstand trying times.”
The Berkadia survey took a deep dive into investor activity. While investors are still active, transactions are being done at a slower pace. A majority of the respondents agreed that investors are holding off on investments due to uncertainty, particularly in the Northwest, 73%, and Midwest, 68%.
A quarter of the respondents in the Mid-Atlantic region reported that the primary focus of investors is acquiring properties, while 18% of respondents in the Northwest reported that the primary focus is the recapitalization of assets.
In terms of institutional transaction volume in 2023, three-quarters said they believe it will be weaker than last year. In addition, more distress is anticipated due to redemption queues, floating-rate maturities, and expiring caps.
“Economic instability has been causing both short- and long-term disruptions for investors,” said Katai. “It’s more important than ever for investors to understand the trends shaping the commercial real estate landscape, and our team is well equipped to provide valuable, actionable insights to help them see around corners. While we weather this ‘transitionary’ period before the ‘new normal’ is defined, we remain focused and continue to be bullish on the multifamily industry as a whole.”
With many developers extending project timelines because of increased costs and labor shortages over the past two years, approximately 565,200 units are scheduled to come online by the end of 2023, marking the highest annual deliveries in over two decades.
In response to the high number of deliveries, 59% of Berkadia’s mortgage bankers and investment sales advisers said they expect renter demand to outpace supply, decreasing from 80% in 2022.
The Berkadia survey respondents also weighed in on shifting renter patterns. When asked about what generation was the most active renter in their region, respondents cited millennials and Gen Z at the top of the list; baby boomers and Gen X had the smallest share of renters. The Southeast, 78%, and Northwest, 70%, had the highest percentage of millennial renters, while the Midwest, 42%, had an increasing number of Gen Z.
“It comes as no surprise that the Gen Z population is beginning to represent a larger number of renters throughout regions as they become more immersed in today’s workforce,” said Katai. “As we see interest rates and home prices continue to rise, we suspect that younger generations will continue to gravitate toward the renter lifestyle.”
Location and security are the most important priorities for renters, outside of cost, according to survey respondents. In addition, Berkadia’s mortgage bankers and investment sales brokers agreed that major metros continue to be most attractive to investors at 39%, followed closely by secondary markets at 36% and suburban areas at 25%.
The survey also found that baby boomers are most commonly renting single-family build-to-rent housing, and Gen X households are renting Class A and B properties. Looking ahead, the respondents believe investor interest will focus on Class A, 29%; Class B, 28%; and true affordable housing, 17%.
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