Prices for single-family homes have risen at record-breaking rates over the last two years, forcing many first-time buyers to postpone their plans and continue to rent. Furthermore, as more Generation Z renters (aged 18 to 23) left their family homes for apartments, demand for affordable multi-family housing increased.
This is good news for investors looking for affordable multi-family housing for sale, as the passive income generated by tenants’ rent will increase their cash flow.
Renters and investors, on the other hand, still dealing with the effects of runaway inflation, living and renting in an increasingly expensive world. Moreover, Fannie Mae predicts a slowdown in multi-family construction. How will this affect the multi-housing outlook for next year?
The Federal Reserve’s Interest Rate Plans for 2023
It is impossible to forecast an accurate outlook for multi-family housing and renters without first reviewing the Federal Reserve, or “the Fed,” as it is colloquially known.
One of the Fed’s primary responsibilities is to monitor the country’s financial systems and to promote economic health.
From 2020 to the present, this responsibility has been clear.
- In response to fears of a long-term recession, the Fed Reserve reduced the federal funds rate to around 0.25% in 2020.
- In late 2021, the national economy was hit with rampant inflation.
- The Fed responded by raising interest rates four times in 2022, raising the federal funds rate from 3.75% to 4.00%.
The Fed hopes to discourage consumers and businesses from buying with credit by creating more expensive credit. This helps “cool” the economy and put the brakes on inflation.
This strategy has been described as “bad-tasting, but effective” economic medicine.
How lousy will rates taste next year?
Rate Forecasts for 2023
The taste of Federal rate hikes is unlikely to improve in 2023. Rates are expected to rise further from 4.5% to 4.75%, according to the President of the Federal Reserve Bank of Chicago.
The question for investors financing multifamily property purchases is, how many will postpone their investments in 2023?
Investors who do not postpone their expansion into multi-family property sales may still profit even if they pay more for commercial property financing. This is due to rising rental rates and increased demand for additional units.
How Rising Interest Rates Might Affect Multi-Family Housing Investors
While most developers dislike deferring a new project, higher interest rates result in expensive credit. Some analysts predict that some apartment construction in 2023 will be delayed, but not all.
For example, a developer’s financial backers may decide to raise the rental rates of a finished building to help cover the additional cost of credit used to purchase construction materials.
This could result in higher rents for newly constructed multifamily real estate.
This is only half of the story. It is unrealistic to consider how rising interest rates will affect investors without taking into account the impact on their tenants.
Will Tenant Preferences Shift?
It is well worth the time and effort for investors to conduct research on potential renters in their preferred area.
- Roommates are becoming more popular among renters in some cities. More two- and three-bedroom units may be added to new projects by developers.
- Not all renters intend to share, particularly those who work from home. They are frequently willing to pay a premium for one-bedroom and studio apartments.
As an example: When a New York City developer announced plans for a multi-family building made up entirely of 302 square foot studio apartments, 60,000 people applied for one of the 55 units before they were finished.
Here are the specifics on new affordable multi-family housing projects scheduled to begin construction in 2023.
Multi-Family Housing Projects Are Scheduled for 2023
The demand for rental units grows in tandem with the number of renters.
Multifamily construction will reach an all-time high of 841,000 units under construction in 2022. Furthermore, building permits increased by 25.5% year on year.
Some industry analysts have identified a renter bottleneck as more would-be homeowners are priced out of the market and younger workers leave the family home.
Rates that have put off would-be homebuyers also have an impact on developers. Some have already decided to postpone the start of construction. The number of multifamily units that have been officially authorised by city officials but have yet to be built is demonstrated.
Experts predict that this trend will only worsen in 2023. Will the predicted logjam be caused by the number of renters in 2023? Will rents increase, and how much? Apartment managers have access to information.
Data and Forecasts on Tenancy and Rent Rates
‘The national rental price index fell by 0.7% in October 2022, according to Apartment List’s research team.
However, rent prices have continued to rise above pre-pandemic levels. Rents had increased by around 5.8% year on year as of November 2022.
Researchers also discovered that the vacancy index increased to 5.5%.
If you’re wondering why vacancies have increased, it’s because of a slower rate of “household formation.” Younger, more nervous renters prefer to stay at their parents’ house or with roommates.
Nevertheless, today’s vacancy index remains lower than the pre-pandemic norm. This translates into a year filled with opportunities.
One Thing’s for Sure: Additional Housing Is Needed
While industry analysts disagree on the current outlook for multifamily housing, a need for additional units has been identified for 2023 and beyond
Increased mortgage costs, more first-time homebuyers priced out of the market, and inflation contribute to unit shortages in many areas.
Rising interest rates may cause some, but not all, new multi-family construction to be delayed.
As with any investment strategy, begin with market research and, if necessary, the assistance of a broker.