As rental demand returned during the first half of 2023, Freddie Mac is forecasting a continued stabilization for the multifamily market in its midyear outlook. However, the government-sponsored enterprise (GSE) expects to see below-average growth during the remainder of the year.
“Midway through the year, we are starting to see a return to more normal patterns although performance is a bit weaker,” said Sara Hoffmann, director of multifamily research at Freddie Mac. “We expect multifamily fundamentals to perform slightly below long-term averages this year, which will feel particularly slow compared with the pandemic boom years, and even the years leading up to it. But positive demand and modest rent growth indicate the multifamily market is stabilizing.”
Freddie Mac is forecasting a contraction in multifamily origination due to macroeconomic headwinds, including elevated interest rates. Origination volume is projected to fall about 17% from 2022 to about $370 billion this year.
According to the GSE, the upward pressure on cap rates due to the higher 10-year Treasury rate is putting downward pressure on property prices, which have declined on a year-over-year basis for the first time since 2010. In addition, buyers and sellers are not on the same page on asset values due to the higher interest rates and slowing fundamentals.
In addition, Freddie Mac’s baseline forecast projects vacancy will end 2023 at 5.1% and rent growth will total 3.1% for the year. It also anticipates gross income growth totaling 2.8% for the year. The markets with the highest gross income growth for the year are expected to be concentrated in Florida along with primary and secondary markets on the West Coast and in the mid-South.
Other key takeaways from the midyear outlook include:
- Across 42 markets, renting was less expensive than homeownership on a monthly basis in all but six markets, with the average discount to rent versus own at 17%.
- While demand picked up in the second quarter, it still remains weak on average. The nation has grown on average 170,000 households per quarter from the third quarter of 2022 to the first quarter of 2023. “The lack of new households helps explain the lack of new apartment demand during that time,” noted Freddie Mac.
- As of May, the national occupancy rate was down 180 basis points (bps) year over year but is 10 bps higher than the long-term 2000 through 2022 average. In May, Cincinnati, Indianapolis, and Cleveland had occupancy rates 150 bps higher than their long-term averages, while Minneapolis; Oakland, California; and Memphis, Tennessee, were well below the long-run averages.
