What’s in Store for Multifamily Markets in 2023?

Heading into the new year, multifamily experts are concerned about how the industry will be impacted by the rise in interest rates as the Federal Reserve continues its efforts to cool inflation.

“The inevitable economic slowdown raises questions about when the impact will start to be felt and how much the sector will be affected,” says Doug Ressler, manager of business intelligence at Yardi Matrix. “Demand has weakened since the first quarter [of 2022] due to slowing job growth and concerns over the macroeconomic environment. The robust household formation that drove demand in 2021 is no longer in effect. With debt costs higher and still rising, property sales and new construction are set to slow. It’s difficult to trade when values are uncertain and banks are sure to cut back on financing construction for projects that have not yet broken ground, even though the country faces a housing shortage.”

While the industry benefited from strong rent growth and low interest rates during the pandemic, a deceleration in rents, although gradually, has been seen across rent reports toward the end of 2022.

“We’re not going to have the kind of rent growth that we have had—it will be more traditional,” says Brian Zrimsek, industry principal at MRI Software. “But as we find our new normal, now we will be back to talking about affordability again.”

In December, Yardi Matrix slightly lowered its rent growth forecast for 2023 from 3.7% to 3.5% with the possibility of a mild recession. It also says it expects some localized turbulence in markets that have a large amount of supply delivery, but how much turbulence will be dependent on local job markets and how they fare during a downturn.

Multifamily experts share some of the markets that have already been impacted by a cooldown as well as others that they are keeping an eye on for 2023 for better or worse.

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Some boomtowns that benefited the most during the pandemic—Boise, Idaho; Austin, Texas; and Phoenix—are now starting to cool, causing concern for some experts.

“Boise had a huge spike in for-sale as well as rent trends; they are cooling off pretty quickly,” says Zumper CEO Anthemos Georgiades. “As the cards settle on the other side of the pandemic, people are being recalled to the office or these cities didn’t have the staying power for renters.”

Carl Whitaker, director of research and analysis at RealPage, highlights the story that has played out in Phoenix.

“The Phoenix market story has quickly transformed in the past two years, and the outlook for 2023 is arguably the most bleak the market has seen in a decade,” Whitaker says.

He says in the year-ending third quarter 2022, 51.8% of expiring resident leases were renewed, down 3% year over year and the second largest drop in the country. In addition, leasing traffic also dropped 25% during the same period. “While that isn’t the largest drop in the country, it’s certainly concerning and especially so considering that retention rates are falling, too,” Whitaker adds. “Those two factors are enough to raise caution alone, but the fact that Phoenix is facing a construction pipeline that totals some 40,000 multifamily units is what looms largest. By comparison, the market’s pre-Great Recession multifamily construction peak was about 10,000 units.”