By Leah Draffen
Leading multifamily real estate fund manager Origin Investments predicts a moderate recession by October 2023 and negative annual rent growth of 1% to 5% with increasing levels of real estate investor or manager distress. However, because of strong real estate market fundamentals, Origin expects rent growth to return in 2024 and build-to-rent (BTR) developments to be a leading real estate investment opportunity in 2023.
“Current conditions in the multifamily market are causing some investors to retreat to the sidelines until there is greater direction and clarity for the economy and the sector,” says David Scherer, co-CEO of Origin Investments, who compiles the firm’s top predictions each year. “But when you look at the basic fundamentals—demand and the long-term prospects for increasing rents and asset values—there is no better sector today than multifamily real estate.”
For 2022, Origin predicted that inflation would impact all factors associated with multifamily investments. Based on a 15-year track record in the industry, a management and investment team with hands-on experience, and its proprietary suite of machine-learning models, Multilytics, Origin’s predictions include the following:
- A recession is coming. With 100% certainty, Origin is predicting a recession by October, based on the modeling completed by Multilytics. One of the most predictive indicators of a recession is an inverted yield curve, which the U.S. has seen since the end of March. Historically, an inverted yield curve is almost always followed by a recession, Origin says. “While Multilytics can’t foresee the length or depth of a recession, we’ll likely be swimming closer to the deep end of the pool,” Scherer says. “It won’t be as deep as the Great Recession or as brief as what we saw in the pandemic-influenced recession of 2020. But it will be a serious downturn without a soft landing.”
- Rents will enter negative growth territory. According to Multilytics’ analysis, rental rate growth will range from -1% to -5% in 2023, depending on the market. Origin says negative rent growth will occur in part because current affordability ratios are not sustainable. A healthy ratio is nearly 25% of income toward rent. Today, the ratio in many markets ranges from 30% to 38%. Also, forecast deliveries of new apartment units in 2023 will put further downward pressure on rents. Although negative rent growth will be unpleasant for investors, Origin characterizes 2023 as an anomaly and rent growth will return to largely positive territory beginning in 2024 and remain positive through at least 2026. “When rent growth ranges from 10% to 20% for two years in a row, it is reasonable to believe that a flat or negative year will bring you back into balance and a level that will be healthier over time,” Scherer says.
- Inflation has peaked and will decline to around 4.5%. Inflation was 7.1%, according to November CPI figures, the smallest year-over-year gain since this time last year. Commodity pricing, supply chain pressure indices, and shipping container backlogs have moderated partially because of four consecutive 75-basis-point increases since mid-June 2022. There is still a long way to go to get to the Fed’s target rate of 2%, and it is not likely that inflation will fall as quickly as it rose. Origin expects that by the end of 2023 inflation will be at or about 4.5%.
- Wage inflation will persist. Wage inflation persists because of the significant shortage for blue-collar and service-industry jobs, Origin says. The layoffs occurring in the financial and technology sectors are overshadowed by the shortage in the service sector like hotels, restaurants, and retail. Companies are paying more and increasing costs to attract a quality workforce. The beneficial pay for employees will maintain upward pressure on and impact inflation for longer than most people think, Origin says.
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