Positive Shifts Ahead in Multifamily: NMHC

NMHC Annual Conference 2023. Image by Jordana Rothberg

“It is unusual for us as the industry darling to face valuation challenges, slowing rent growth and somewhat soft renter demand,” Hessam Nadji, president & CEO of Marcus & Millichap, said of multifamily to the attendees of the National Multifamily Housing Council’s 2023 Annual Meeting. “Very unusual.”

Based on the surface of the facts facing multifamily, some outlooks can look scary. Multifamily unit absorption, according to Nadji, has turned negative while a multitude of apartments are under construction currently as well as were delivered in 2022. The industry is also currently facing the fastest economic tightening since 1980. However, as we pace further in 2023, Nadji expects we will start to reach normalization and have clarity on where the markets are going.

“Five years from now we will be looking at the current set of dynamics as a current and rather unexpected temporary aberration,” Nadji told Multi-Housing News.

The issues at hand

Despite different NMHC panelists disagreeing on just how bad multifamily and the general real estate’s current circumstances actually are, the issues at bay were largely similar across discussions. Multifamily faces a tightening of financing, rising interest rates, high construction costs, prolonged construction timing, loan defaults and the challenges of potentially overbuilding in certain markets.

When asked if the panelists believed construction rates would regulate and find a sense of normalcy again, Chip Bay, chief construction officer at Mill Creek Residential, responded saying some people in the industry believe they already have. Therefore, the plan is re-budgeting for these higher costs as opposed to waiting to see what the future holds.

Further, after a strong 2022, lenders are being seen resetting allocations for 2023 amidst volatile and uncertain markets. With proper funding more difficult to come by on top of already steep construction and building costs, many projects anticipated to begin in 2023 have either paused until 2024 or been entirely canceled.

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While construction activity is slower than usual, transaction activity is simultaneously slower as well. Despite buyer demand remaining strong, the bid ask gap between buyers and sellers makes deals less frequent. “For most operators, there is no urgency to sell or reduce prices,” Nadji told MHN. “At the same time, for a lot of operators who used short term debt that is maturing as well as long term debt that was placed five to seven years ago there is a bridging challenge between the cost of debt they are used to and what is available in the current marketplace.”

A better future on the horizon

With so many issues at bay it may be difficult to see the silver lining. Several panelists and speakers throughout the NMHC conference, however, gave reasons for retaining hope.

Senior Managing Director & Co-Chief Investment Officer at Bridge Investment Group, Colin Apple, said that the long term fundamentals of multifamily as an asset are good. The market, over the next couple of years, he believes, will slow. Some assets will be better located and positioned than others. In the longer term, once we are through the current pipeline of new deliveries, the multifamily industry will still be undersupplied and increasing in value.

Carl Whitaker, director of research and analysis for RealPage Inc., said that across a number of multifamily demand KPIs there are already signs of stability in leasing rates, renewal rates and occupancy. This indicates the markets may return much more quickly than in the span of the next couple of years.

Nadji spoke during the conference saying three things need to happen for the stars in multifamily to align and bring some clarity: an understanding of when the Federal Reserve will finish raising interest rates, clarity on the recession and a recalibrating of the multifamily industry. Once the markets have a greater understanding about the timeline of teach of those three things we can hope to see normal trading activity later in 2023, according to Nadji.

“Our current challenges in the industry are short term. The fact remains that housing is significantly undersupplied at a macro level,” Nadji told MHN.