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According to the Freddie Mac Multifamily 2023 Outlook, the apartment market will continue to cool off in 2023 with rent growth moderating, vacancies ticking upward, and loan originations slowing.

“Volatile capital markets and a rise in the 10-year Treasury rate have driven a contraction in multifamily lending in 2022 that will persist into 2023,” says Steve Guggenmos, vice president of research and modeling for Freddie Mac Multifamily. “Economic uncertainty and rising prices have led to waning housing demand. This paired with elevated construction levels will drive rent growth to level off and eventually normalize. This environment is putting downward pressure on property values, which have grown at a heightened pace in recent years.”

Property values are expected to decline, but gross income growth will remain positive. Fundamentals are likely to rebound slowly in the second half of the year as the market stabilizes. The outlook projects gross income to increase 3.5% and the vacancy rate to rise modestly to 5.1%.

Other findings and projections include that some data providers are now indicating rents are declining on a monthly basis. Freddie Mac expects growth for 2022 to end the year between 6% and 8% year over year.

The government-sponsored enterprise also expects vacancy rates to end for 2022 up slightly over the prior year as multifamily construction levels remain extremely high. This could put additional pressure on fundamentals in some markets.

Freddie Mac expects the best performing markets in 2023 to be predominately smaller Southwestern and Florida markets. The bottom performing markets are a geographically diverse mix of small and large locales, many of which are expected to see high levels of new supply.

As rates have increased throughout 2022, cap rates have held relatively stable causing spreads to compress, which will put upward pressure on cap rates and put downward pressure on valuations.

Because of broad economic uncertainty and a volatile Treasury rate environment, origination volume in 2022 is expected to fall about 5.5% to a total of $460 billion, with 2023 seeing a further decline of 4% to 5% to $440 billion, Freddie Mac says.