"Fundamentals remained healthy, but doubts abound"
Multifamily rents continued to rise through the first half of the year, despite economic headwinds that slowed down rent growth in recent months.
US asking rents increased $17 (0.9%) through the first five months of 2023, according to the latest Yardi Matrix Multifamily Outlook report. However, year-over-year growth dropped by 2.6%.
“Multifamily fundamentals remained healthy through the first half of the year, but doubts abound about the impact of interest rates on the economy and capital markets,” the report read. “Demand is holding up, fueled by ongoing robust job growth and strong consumer balance sheets. Yet the capital side of the industry is facing significant headwinds from higher mortgage rates.”
However, Yardi experts anticipate continued deceleration, with rent growth of 2.5% for the full year. The average apartment rent hit an all-time high of $1,716 in May.
Challenges for the sector include dwindling demand, continued affordability issues, slower population growth, and competition from an influx of new units coming online in 2024. Additionally, the report noted that debt has become more expensive, and fewer banks are financing construction as the market struggle with higher interest rates.
“Concerns about the robust expansion of supply could be short-lived since growth is likely to slow after the current round of projects is completed,” Yardi Matric experts said. “Tightening of bank lending standards - combined with rising costs of construction materials, labor, and land - has made new projects harder to pencil. Construction debt starts at 8%, most senior lenders limit proceeds to 60% or less of total costs, and junior construction debt carries rates in the mid-teens. That puts a crimp on new projects for companies that don’t come to the table with a significant amount of capital.
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“Although construction is extremely sensitive to pricing and availability of capital, many of the projects that are getting underway now have been in the works for a year or more. Thus, starts may remain strong in the coming months. Eventually, though, the high cost of debt and waning bank interest will lead to a reduction in starts.”
Yardi Matrix expects 430,000 multifamily units to be delivered this year, a gain of 2.8% of stock.
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