Still penciling deals: Apartment sector fundamentals well positioned, despite moderation
- May 1, 2023: Vol. 10, Number 5

Still penciling deals: Apartment sector fundamentals well positioned, despite moderation

by Loretta Clodfelter

The multifamily sector has been one of the strongest property types in the post-pandemic era, though it showed some signs of moderating in 2022 compared with 2021. Apartment sales transactions fell 16.1 percent in the past year, according to Yardi Matrix, from $222.9 billion in 2021 to $187.0 billion in 2022.

Apartment rents also are moderating, according to Yardi Matrix, which saw rents flat in January from the previous month. Although the pace of apartment rental growth is slowing, the multifamily market is likely to remain strong.

“We expect the apartment sector to remain strong, especially within the coastal markets,” says Jeff Turkanis, CIO of Veris Residential. He adds that the pace of rental growth should slow and normalize over the coming years.

Kristi Nootens, co-head of CP Capital, agrees: “While we are currently seeing a pullback from multifamily’s historical outperformance in 2021, CP Capital remains confident in the sector’s enduring appeal and views these recent trends as part of an inevitable return to normalcy after an unsustainably robust campaign in 2021.”

Although rising interest rates could pose a challenge for some investors, the broader economic environment continues to support apartment investment.

“We anticipate that the Federal Reserve will continue to increase interest rates through the beginning of 2023, pushing the economy further into a recessionary state and making it more difficult to find deals that make sense financially,” says Gautam Goyal, CEO and co-founder of Three Pillars Capital Group. “Despite these headwinds, we remain extremely optimistic about the fundamentals of the apartment sector as the multifamily industry remains undersupplied and demand for quality rental housing continues to grow.”

As the cost of homeownership continues to rise and the supply-demand imbalance persists, CP Capital is optimistic the current slowdown in rent growth and demand will be short-lived. “A near-term surplus of supply will be followed by a period of lower supply as the decline in new construction starts expected in 2023 works its way through the pipeline,” says Nootens.

Industry watchers expect the interest rate environment to cool off toward the end of the year. They predict deal volume will pick up as buyers and sellers find equilibrium.

“On the capital markets side, many of the big-name institutional players who influence the tenor of the multifamily industry viewed the changing dynamics of the market as a good excuse to pull back until conditions settled,” observes Nootens. “However, consensus expectations for 2023 remain positive. … Once interest rate increases halt, we can expect to see buyers return to the market and pricing to strengthen once again due to the pent-up investor demand.”

On a year-over-year basis, Yardi Matrix reported, multifamily rents rose 5.5 percent in 2022, much slower than the 13.5 percent growth recorded in the previous year.

“The rent growth achieved over the past two to three years was not sustainable. However, even with normalized growth, the apartment market is still attractive. The U.S. continues to be undersupplied for housing, and with inflated costs, this should help curtail future supply,” says Turkanis.

Nootens points out that rent growth rates are coming down from historical and unsustainable highs, and the lower rent growth seen during the fall of 2022 is in line with seasonal patterns dating back to before the pandemic.

“Despite current macroeconomic headwinds, CP Capital’s investment thesis remains the same,” says Nootens. “We plan on continuing to invest in development projects alongside our best-in-class development partners, and delivering high-quality multifamily projects as the economy eventually improves and market conditions strengthen. Our strategy is born out of a healthy long-term perspective on multifamily as an asset class, focusing on strong underlying fundamentals and historical precedent.”


Loretta Clodfelter is senior editor of Institutional Real Estate Americas.

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