Freddie Mac Expects Pace of Growth to Slow in Second Half
The GSE’s Midyear Outlook notes that key fundamentals remain strong despite macroeconomic concerns.
Citing a heightened degree of economic uncertainty, volatile Treasury rate environment and downward pressure on property valuations, Freddie Mac expects multifamily origination volume to slow for the second half of the year dropping between 8 to 10 percent, to $440 billion to $450 billion, according to its 2022 Midyear Multifamily Outlook.
In its 2022 Multifamily Outlook released in January, the GSE had predicted loan originations could hit $500 million based on ongoing demand for existing multifamily properties. At that time, the multifamily sector was coming off a record-breaking 2021.
Despite its concern about macroeconomic conditions, Freddie Mac expects multifamily fundamentals to remain quite strong and said in its forecast the industry is positioned well for a solid performance for the remainder of the year despite the anticipated contraction in sales and lending.
Steve Guggenmos, vice president of multifamily research & modeling at Freddie Mac, said in a prepared statement they believe the multifamily industry is well positioned to weather the economic uncertainty and interest rate volatility impacting the broader economy throughout the rest of the year. He said rent growth and occupancy will remain above their long run averages.
Every market tracked by Freddie Mac is expected to experience gross income gains with Florida and the Southwest markets projected to outperform the nation. Smaller markets in the Midwest and some gateway markets are expected to be among the comparatively weaker performers. However, the overall gross market income in 2022 is forecasted to be about 6.8 percent with vacancy rates remaining flat at 4.8 percent. Looking ahead to 2023, Freddie Mac projects vacancy rates to increase slightly to 5.1 percent, just below the long-term average. Growth income for 2023 is expected to slow to 4.3 percent bit remain above the long-term average of 3.6 percent.
Tracking Rent Growth
The Freddie Mac outlook notes rent growth remains exceptionally high, increasing by 16 percent over the year ending in June. More markets have seen higher rent growth over the past 18 months compared with the five years prior to the start of the pandemic. Since January 2021, every market saw rent increases of at least 10 percent and about two-thirds had rent growth of 20 percent or higher.
Rent growth has been particularly strong in Class A and Class B units, rising 15.6 percent and 16.3 percent respectively. Class C rents saw more moderate increases but were still up 12.8 percent year over year as of June.
Renewal rates hit a new record in the first quarter of 2022, hitting 58.4 percent before moderating to 56.9 percent by the second quarter. Rents for new tenants were up, on average, 18.8 percent, compared to rent increases of 10.8 percent for tenants renewing leases. The report notes tenants may be opting to stay and renew their leases rather than paying higher rents at a new property. Since the second quarter of 2021, new lease rate increases have far surpassed renewal rate increases.
Part of the lack of movement may also be lack of new properties to move into. While demand has been increasing the past several quarters, the supply of new housing units has not kept pace. Completions totaled 363,000 units in 2021, down about 0.3 percent compared with 2020 completions. As of the second quarter of 2022, completions were down 9.7 percent compared to 2021. The downward trend indicates construction delays continues to be an issue. The new supply is not being delivered fast enough to meet the demand.
Supply chain issues and rising costs are still impacting the industry and slowing the amount of time it takes for new apartment units to deliver. The availably of labor is also causing slowdowns and construction delays, according to Freddie Mac.
Despite the ongoing supply and labor issues, multifamily permits and starts were up over the past 18 months and are the highest levels since the mid-1980s. Permits through June increased 10.6 percent and were up more than 40 percent compared to the five years leading up to the pandemic. Starts are also increasing, up by more than 16 percent. New York City continues to have the most amount of development starts, followed by Austin, Texas; Dallas; Houston and Philadelphia. Austin saw its number of starts nearly double due to increased demand while Philadelphia’s increase was driven by a change in its tax abatement policy that accelerated many developers’ plans. Other markets seeing meaningful increases in states were Phoenix and Nashville, Tenn.