While Phoenix, a pandemic boomtown, is starting to cool, it also is facing a massive construction pipeline.
Adobe Stock While Phoenix, a pandemic boomtown, is starting to cool, it also is facing a massive construction pipeline.

Heading into the new year, multifamily experts are concerned about how the industry will be impacted by the rise in interest rates as the Federal Reserve continues its efforts to cool inflation.

“The inevitable economic slowdown raises questions about when the impact will start to be felt and how much the sector will be affected,” says Doug Ressler, manager of business intelligence at Yardi Matrix. “Demand has weakened since the first quarter [of 2022] due to slowing job growth and concerns over the macroeconomic environment. The robust household formation that drove demand in 2021 is no longer in effect. With debt costs higher and still rising, property sales and new construction are set to slow. It’s difficult to trade when values are uncertain and banks are sure to cut back on financing construction for projects that have not yet broken ground, even though the country faces a housing shortage.”

While the industry benefited from strong rent growth and low interest rates during the pandemic, a deceleration in rents, although gradually, has been seen across rent reports toward the end of 2022.

“We’re not going to have the kind of rent growth that we have had—it will be more traditional,” says Brian Zrimsek, industry principal at MRI Software. “But as we find our new normal, now we will be back to talking about affordability again.”

In December, Yardi Matrix slightly lowered its rent growth forecast for 2023 from 3.7% to 3.5% with the possibility of a mild recession. It also says it expects some localized turbulence in markets that have a large amount of supply delivery, but how much turbulence will be dependent on local job markets and how they fare during a downturn.

Multifamily experts share some of the markets that have already been impacted by a cooldown as well as others that they are keeping an eye on for 2023 for better or worse.

The Market Watch List

Some boomtowns that benefited the most during the pandemic—Boise, Idaho; Austin, Texas; and Phoenix—are now starting to cool, causing concern for some experts.

“Boise had a huge spike in for-sale as well as rent trends; they are cooling off pretty quickly,” says Zumper CEO Anthemos Georgiades. “As the cards settle on the other side of the pandemic, people are being recalled to the office or these cities didn’t have the staying power for renters.”

Carl Whitaker, director of research and analysis at RealPage, highlights the story that has played out in Phoenix.

“The Phoenix market story has quickly transformed in the past two years, and the outlook for 2023 is arguably the most bleak the market has seen in a decade,” Whitaker says.

He says in the year-ending third quarter 2022, 51.8% of expiring resident leases were renewed, down 3% year over year and the second largest drop in the country. In addition, leasing traffic also dropped 25% during the same period. “While that isn’t the largest drop in the country, it’s certainly concerning and especially so considering that retention rates are falling, too,” Whitaker adds. “Those two factors are enough to raise caution alone, but the fact that Phoenix is facing a construction pipeline that totals some 40,000 multifamily units is what looms largest. By comparison, the market’s pre-Great Recession multifamily construction peak was about 10,000 units.”

Ressler waves the warning flag at several West Coast markets, citing that lower renewal numbers reflect a general weakening of overall demand and waning levels of affordability. National lease renewals fell to 60.2% in September, sliding from the peak of 68% in 2021’s fourth quarter. He says the West Coast metros with the lowest levels of lease renewals are Los Angeles, 41.6%; San Francisco, 43.1%; San Jose, California, 43.9%; and Seattle, 50.2%.

Whitaker also points to Nashville, Tennessee, another Sun Belt market with strong in-migration during the pandemic. “Nashville’s tailwinds have fueled a lot of interest among investors and developers in recent years. Excellent population growth, a burgeoning economy, and the intangible ‘up-and-coming’ market factors have pushed this city from a once-overlooked metro into a now key focus Sun Belt metro,” says Whitaker. “There really aren’t too many questions about its long-term demand capability.”

However, in the short term, he is concerned about massive construction volumes, with 26,000 apartments underway as of December. “The ‘wow’ stat here though is that the 26,000 units account for 15% of all existing inventory, and that’s tied for biggest in the nation alongside the likes of Austin,” he says.

He adds that the good news is the construction volume is largely concentrated in a few key submarkets, such as downtown Nashville, North Nashville, and Hermitage/Mount Juliet, making the concerns more focused on select neighborhoods and not marketwide. On the downside, if the U.S. enters a deep recession in the coming year, the market outlook could take a hit as the local tourism economy is quite large relative to other markets across the nation.

Brighter Outlooks

For Zumper’s Georgiades, many Florida markets, such as Fort Lauderdale, Miami, Orlando, and Tampa, have been the big pandemic winners.

“These markets had a huge net migration from New York and California, and they have held up,” he says. “While many markets cool off during the winter, Miami is still posting month-over-month increases. That suggests to us a very permanent migration, particularly from California and New York; renters are staying.”

Georgiades also points to New York and its nearby cities as well-positioned markets. “Multifamily in New York is flourishing,” he says. “New York City didn’t just recover the people, but it has successfully attracted the next generation of workers. It is quite contrarian to what we were hearing a year and a half ago.”

With the New York City metro doing well, the nearby secondary cities, such as New Jersey’s Jersey City and Union City, also are benefiting. “We’ve seen in the pandemic that people left New York and spilled into the neighboring cities, and they’ve retained their popularity. In Union City, for example, demand is high, rents are increasing, and there are record applications for apartments.”

While the Dallas-Fort Worth market has a lot of supply set to deliver, Whitaker says it has remained at the top of the national leaderboard for deliveries for the better part of the past decade without faltering. “If you remove the supply headwinds in this market, it’s hard to find any other significant downside risks,” he says. “Population growth into this metro was only further accelerated by the pandemic’s population shifts, and the DFW economy remains a national juggernaut. Although the Metroplex saw demand slow considerably in 2022, one has to think that the some 200,000 jobs added in the past year eventually has to translate to realized apartment demand. This market may not ever be top five for rent growth and occupancy, but again the downside risks are few and far between.”

Whitaker also isn’t counting out historically slow and stable Midwest markets, such as Cincinnati and Columbus, Ohio; Indianapolis; and suburban Chicago.

He says one of the more appealing factors of these markets is that their “low beta nature” tends to shine during periods of uncertainty. “It’s not so much that you can underwrite double-digit rent growth and exceptional occupancy in these markets in 2023. But the fact that these markets don’t have to contend with much new supply means that even a little bit of demand trickling in is enough to keep things stable,” he notes. “Additionally, these markets didn’t necessarily see demand ‘pulled forward’ into 2021 the same we saw in lots of Sun Belt markets. As such, places like Indianapolis, Cincinnati, and Columbus remain pretty much in line with prior year levels when it comes to retention and new lease traffic. The tortoise and the hare fable is a good comparison for these markets in highly uncertain economic conditions.”

Ressler adds that even though the single-family rental market is cooling from its “red-hot performance,” the housing market turmoil from increasing mortgage rates will have an impact. He says some of the strongest markets to watch are Sacramento, California; Tampa; and Washington, D.C.