After record-breaking price appreciation in 2021*, growth in the multifamily sector is expected to moderate as cap rates expand, pulling the pricing towards more normalized levels of growth. However, rising inflationary pressures and further tightening of the housing market means growth in the multifamily market is still possible, even if it drops from the stratospheric numbers we saw last year. Net absorption of multifamily units, for instance, beat a record in the first quarter of 2022, achieving the highest absorption rate since 2000.
**Green Street Advisors - U.S. Commercial Property Outlook, June 2, 2022
Well-located multifamily properties more than a decade old often have untapped potential for rent and income growth. And with the rise in interest rates, there seems to a window of opportunity for firms to purchase these types of properties from owners that are seeking relief from their rapidly rising debt service. As such, there is the opportunity for investors to invest in these unrenovated and under-renovated assets and potentially benefit from the value-add strategy. However, as more real estate firms and sponsors seek out these types of real estate investment opportunities, the number of projects like this may diminish over the next few years as these properties are renovated and rents are adjusted to capture current market rents.
There is also a lot of opportunity in ground-up multifamily developments. The tremendous rent growth in 2021 led to the massive appreciation of this sector, often outpacing the increase in construction costs which were exorbitant in the aftermath of the pandemic. Zelman & Associates’ recently updated its revenue growth from 5.8% to 7.8%, with 13% higher new starts forecasted in 2022 as compared to 2021, setting the stage for “more multifamily completions over the next three years than any comparable period dating back to 1988”. Given the overall undersupply of multifamily relative to demand, we’re not concerned about the increasing supply at the macro level, although some submarkets may overshoot.
We’ve recently updated our CRE Market Outlook, including our outlook for multifamily real estate.
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