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United States Multifamily Capital Markets Report

United States Multifamily Capital Markets Report

3Q 2023

Newmark presents the Third Quarter 2023 United States Multifamily Capital Markets Report.

The spread between renting and owning accelerated in the third quarter of 2023, increasing 15.4% quarter-over-quarter, representing a $994 savings in rent. Driven by an increase in home prices and record-level interest rates, renting continues to be significantly more economical than owning a home.
The third quarter of 2023 saw demand rise to 91,000 units, increasing 12.7% quarter-over-quarter. The second and third quarters, which typically represent the strongest leasing activity, had 171,000 units absorbed in 2023, compared with negative 148,000 the prior year. The top three markets for nominal demand year to date were Houston, Dallas/Ft. Worth and Austin, which combined for 30.3% of demand throughout the US.
Over 128,000 units were delivered in the third quarter of 2023, representing the largest quarterly sum on record. That record is projected to be broken several times in the next handful of quarters. At 2.1%, inventory growth is 70 bps above the long-term average and is expected to climb to 3.4% throughout 2024. As of the third quarter of 2023, new supply outpaced demand by 278,000 units. While still negative, this marks a strong improvement from the first quarter of 2023.
Quarterly rent growth rose 0.5%, while year-over-year growth contracted to 0.4%. Annualized rent growth has declined for six consecutive quarters and, as of the third quarter of 2023, is at a 10-quarter low. While rent growth has cooled in recent quarters, as of the third quarter of 2023, renewals are outperforming new lease trade-outs by 430 basis points. Northeast and Midwest markets now occupy the top markets for rent growth, led by Newark and Cincinnati at 4.9% and 4.5%, respectively. Growth markets throughout the Sun Belt have experienced the largest year-over-year decline.
Multifamily expenses increased 8.1% year-over-year, led by a 25.4% surge in insurance costs. While insurance growth rose substantially, management and other expenses also saw double-digit year-over-year increases, putting a strain on landlords. Coastal markets, including Charleston, Orlando and Tampa, lead the nation with the greatest increase in year-over-year expenses, due in part to each of these markets experiencing insurance growth of 38.0% or greater.
GSE share of multifamily finance has increased sharply in 2023. The bank and CMBS/CRE CLO shares of multifamily lending have contracted sharply in 2023, while the insurance share has remained stable. Debt funds lending share has declined modestly but remains above pre-pandemic levels. Meanwhile, GSEs have gained, rebounding from multiyear lows and playing their role in improving stability in the finance markets.
$682 billion in multifamily loans mature between 2023 and 2025. Banks account for 32% of debt maturities in the full 2023-to-2032 period, but they account for 52% of maturities in 2023 to 2025. Debt fund maturities are similarly frontloaded, accounting for 19% of near-term maturities vs. 11% in the full period. The same is true of securitized lending. It is troubling and perhaps not coincidental that these are the lending sectors that have the most reduced activity of late.
Price dislocation and an elevated interest rate environment continues to hinder the investment sales market, as evidenced by the 61.7% year-over-year decline to $30.1 billion in quarterly sales volume. Multifamily remains the largest share of investment sales of all US commercial real estate property types at 32.4% year-to-date through the third quarter of 2023; however, higher rates paired with lower yields in the property type have resulted in an 7.3% decrease in market share since 2022.
In the years following the Global Financial Crisis and the COVID-19 outbreak, multifamily proved more resilient to investors as it generated greater returns than other property types. Although still down in 2023, as a more defensive and less volatile asset type, multifamily has higher returns than the broader property index thus far in 2023.