- Despite a slowdown in transaction volume throughout the second half of 2022, investment sales volume for the year totaled $294.1 billion, the second largest annual sum on record and 75.0% greater than the 2015-2019 average. Investor appetite for multifamily remains robust, with $233.9 billion in dry powder earmarked for North American commercial real estate; however, in the first half of 2023, activity is likely to be sluggish as price dislocation and valuations are scrutinized.
- Total returns decelerated sharply in the second half of 2022, totaling 7.1% for the full year, outpacing inflation by 70 bps. Income as a percentage of total returns normalized following 2021, where appreciation beat income growth substantially. Multifamily returns turned sharply negative in the fourth quarter of 2022, with garden properties outperforming high-rise properties by 4.0% for the year.
- Coming off a record high level of demand of 662,000 units in 2021, absorption slowed significantly in 2022. Demand is expected to reach 493,000 units in 2023, but high levels of new supply coming online in the new year will offset this, with 576,000 new units set to be added to the current national stock; 2024 demand is also forecasted to experience high levels of supply, expected to total 477,000 units absorbed, compared with approximately 510,000 units added.
- Markets with concentrated technology employment, as well as markets located on the West Coast, have seen the greatest disparity between the cost to rent and own. Across all markets, the one-year change in home ownership cost has grown substantially more than change in apartment rents, in part due to higher mortgage rates. While rents have increased substantially throughout the Sunbelt, the all-in cost of home ownership in Atlanta, Charlotte, Nashville, Orlando and Tampa outpaced rental growth by 40% or greater.
- After 20 straight months of positive month-over-month rental growth, rental growth stalled to in September where it was 0%, then has since declined 0.4% in October, November and December. It is normal for rents to decline in September to December; 2021 was in fact the outlier. Rents peaked at 14.0% above pre-pandemic levels, ending the year 11.0% higher.
- The GSE’s act as a backstop to the market; however, their overall function has been somewhat diluted of late, as: 1) lending caps have been imposed and those are growing slowly; and 2) they have become more exclusively focused on mission-driven lending. As the market growth, they are providing less proportional and more targeted liquidity support, which makes a repeat of 2009 less likely but also leaves the market subject to greater “normal” volatility.
- Transactional cap rates have expanded in back-to-back quarters, averaging 4.92% nationally as of the fourth quarter of 2022. After several years of converging yields, particularly between core/core-plus and value-add product, risk is currently being repriced.
- Banks are likely to be less active as they digest their expanded loan books, and the GSE’s will be active but static on volumes. The recent decline in spreads and reduced volatility in bond yields could incentivize market-driven lenders, such as CMBS, debt funds and life insurance companies to be more active on the margin. There is already some evidence of this in the corporate bond market, with new issuance picking up.
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United States Multifamily Capital Markets Report
4Q 2022
Newmark presents the Fourth Quarter 2022 United States Multifamily Capital Markets Report.