Even though apartment rent growth may be slowing, there are still plenty of reasons to be upbeat about the next year.
When you ask someone in the multifamily/apartment industry how they think the year 2023 will go, you usually hear one of two responses: Either everything is about to collapse and the sky is falling, or everything is progressing steadily but definitely.
1. Recently Occurring Events
Let’s start by reviewing the most recent news. There is a lot, and much of it is not very good. Having said that, you’ll be OK if you avoid viewing everything as a part of a longer-term pattern.
- Loan issues
There are a few significant debtors that have run into some difficulties, like Chetrit Group and Veritas.
With a $481 million floating-rate CMBS loan, Chetrit was reportedly close to defaulting. Essentially, the corporation used the loan in 2019 to finance 43 distinct properties before tragedy hit due to a confluence of rising interest rates and serious vacancy difficulties throughout the portfolio.
The predicament faced by Veritas was comparable but more serious. In San Francisco, around 1,700 affordable housing units totaling $450 million were financed by an investor who went into default. There was a second CMBS loan, with a variable rate, in case you were curious.
Distressed assets are inevitable when interest rates rise, especially for investors who foolishly committed to floating-rate loans without the opportunity to refinance. Do not, however, interpret these two instances as portending the sector as a whole.
The environment is shifting, even for investors who stay ahead of their debt payment obligations.
Have a look at TheRealDeal’s report on Tides Equities from the beginning of February. The significant value-add investor’s bottom line has suffered as a result of a combination of slowing rent growth and once again rising interest rates on its variable-rate financing options.
Rising rates are a prevalent factor in this situation. As long as there are no drastic declines in occupancy, fixed-rate borrowers don’t need to worry too much.
2. Extended Trends
Now, keeping that in mind, let’s move on to what the majority of us anticipate for the remainder of the year.
- Vacant Shifts
Let’s revisit the occupancy declines I stated before.
Yeah, this year’s occupancy is predicted to decline somewhat. A large portion of this is connected to the enormous number of flats that are expected to be delivered this year. RealPage estimates that number to be at 590,000 additional units in 2023. According to Yardi Matrix, the actual number will be closer to 440,000 units.
Regardless matter who is closest, it is impossible to dispute that a large number of multifamily complexes have completion dates this year. As those units go online, there will be more vacant space. Let’s face it: It’s unlikely that all of these additional apartments will be quickly occupied; even if they are, it will just leave unoccupied other units.
If increasing occupancy is your major objective, you may do so immediately away by taking several significant actions. Do those things. Pay attention to resident retention: You don’t want to witness a move-out of renters from your building to a recently finished Class A property down the street.
Nonetheless, occupancy won’t decline drastically on a nationwide scale: According to a different RealPage source, the decline will be roughly 30 basis points. Certain metros’ declines will be more pronounced, and some kinds of properties in those areas may experience even greater declines. If you’re prepared and have a property that’s in reasonably decent shape, you shouldn’t have too many problems.
- Raised Interest Rates
Let’s now discuss rising interest rates. We’re still not out of the woods, as the Federal Reserve recently announced its eighth straight rate increase at the beginning of February. Before the Fed stops its pace, I would anticipate seeing a further two jumps of 25 basis points.
This is unfortunate for a variety of reasons, particularly if you’re a big floating-rate operator like Chetrit, Veritas, or Tides. But even if you’re not, let’s consider the evidence: In securitized loans alone, there is around $162 billion in commercial real estate debt that is due to expire this year. That’s a huge increase over the previous year.
This year, a lot of people will have to apply for new loans at higher interest rates, or they may be forced to sell off part of their possessions.
Naturally, we frequently overlook the fact that a higher federal funds rate does not automatically equate to higher mortgage rates.
Now, look at Freddie Mac. The agency announced a 40-basis-point discount for any February agreements, which follows prior year discounts.
Discounts, by their very nature, don’t stay forever, so those who wait until the very last second may lose out. If you have a loan coming due, it’s advisable not to wait because rates might increase to levels last seen in 2006 and 2007.
- Domestic Organization
When a lot of flats go on the market this year, occupancy will inevitably decline. Yet if household formation stays at a low level, demand may also be declining.
Domestic Organizations dramatically decreased in 2022. The fourth-quarter report from RealPage highlighted the uniqueness of dropping demand amid a period of rapid employment growth and income rises.
But, there are currently indications that the rate of household formation is increasing, which would ultimately increase the need for renters. Despite this, it’s unlikely to pick up enough to cover the new apartment buildings that are launching all year.
- Trends in Multifamily Rent
I’ll say it out loud: The forecast for 2023 is positive, but if you only become active in the industry after 2020, your definition of “positive” may differ from mine.
For instance, Yardi Matrix initially predicted that rent growth would decrease to 3.1% this year. Marcus & Millichap predicts a 3% increase overall.
Even though it is significantly slower than the previous two years, that is close to the sector’s historical norms. Of course, Yardi Matrix did lower its prediction to 2.6% later in January. Although it is below average, it is still considered to be normal.
As informed investors, we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
Contact Estateserve today and realize your cash flow goals.
What are some factors that can affect the outlook for apartment mortgage lending in 2023?
Factors such as interest rates, inflation, employment rates, and the overall state of the economy can all have an impact on the outlook for apartment mortgage lending in 2023.
What are some alternative financing options for apartment mortgages?
Alternative financing options for apartment mortgages may include private loans, crowdfunding, or government-backed programs such as FHA or USDA loans.
How do lenders determine whether their outlook is bullish or bearish?
Lenders consider various factors such as the current state of the market, economic indicators, and the demand for apartment mortgages to determine whether their outlook is bullish or bearish.
