Despite economic uncertainty around rising interest rates and inflation, the multifamily sector continues to see strong demand.
According to Berkadia’s 2022 Mid-Year Powerhouse Poll, conducted in July with insights from 123 investment sales brokers and mortgage bankers across 65 of the firm’s offices, 80% of respondents expect rental demand to outpace supply for the rest of the year.
Investor demand so far this year differs from region to region, largely based on migration trends. More than three-quarters of the poll respondents said the Southeast has seen an increase in demand, while 45% said the West has seen a decrease. Berkadia professionals across the Southeast, Southwest, and West agreed that they have seen a moderate increase in property supplies in their regions.
Eighty percent of the respondents said rising rates and inflation have had a high impact on their local markets, while 94% said rent increases will have a significant influence on multifamily deal volume.
Almost three-quarters of Berkadia professionals said location is the second most important aspect for renters after cost. In addition, half of the respondents said the trend to move out of metro areas, which started during the pandemic, isn’t happening as rapidly.
According to the poll, investor focus remains on Class A, with 40% of the response; Class B, 25%; affordable, 15%; and single-family build-to-rent, 13%. The Southwest is experiencing high Class A demand, while the Midwest favors Class B.
“Despite rising interest rates and persistent inflation, the commercial real estate industry will continue to exhibit resiliency, proven by investor demand in our primary and secondary geographic markets across the country,” said Ernie Katai, executive vice president and head of production at Berkadia. “With the rising cost of homes and interest rates, the renter lifestyle has increased investor demand in primary and secondary markets across the country. While we continue to navigate economic volatility in the second half of the year, our team provided a strong start to 2022.”
Forecasting the capital source that would provide the most activity this year, 59% of Berkadia respondents selected private investors, while 31% chose institutional investors.
According to Berkadia, investors are still seeking to build out their portfolios despite the economic uncertainty. More than half of respondents, 55%, said long-term investments will be the most attractive to institutional clients in the next year or two, followed by 25% citing single-family rentals.
“Despite constant changes over the last two years through the pandemic and other unique circumstances within our industry, we feel certain that current conditions will remain favorable,” said Katai. “As investors continue to build out and diversify their portfolios with properties across all regions, we expect demand and investment opportunities to remain steady.”
In addition, growing in importance to investors is the integration of environmental, social, and governance (ESG) measures into their portfolios. Most Berkadia professionals, 44%, said investment properties are being used to meet ESG metrics, while 20% said properties are being rehabbed to comply with energy-efficiency policies.
“The importance of ESG in our industry is undeniable, and these strategies have become imperative for portfolios to create a sustainable and responsible business,” added Katai. “While demand for ESG integration will continue to evolve, this is something that investors will focus on for years to come.”