Long-run Demand Tailwinds Poised to Guide Multifamily Sector Through Near-term Choppy Waters
National Multifamily Index
Major markets in the Sun Belt dominate the top ranks of the National Multifamily Index for 2023. Net in-migration to Florida metros is on an upward bend, helping Fort Lauderdale, Orlando, Miami-Dade and Tampa-St. Petersburg all place in the top five of the Index. Similarly, three major Texas markets hold a spot in the top 10, headlined by Dallas-Fort Worth as the second-highest rated overall.
Due to substantial new construction, some Sun Belt markets like Phoenix, Salt Lake City and Raleigh fall outside of the top 10 this year. Meanwhile, the middle portion of the Index includes primary metros that have improved their outlooks since last year as delayed pandemic recoveries took force. The bottom of the ranking house several Northeast and Midwest markets with lagging household gains, but low construction.
The economy has made a resounding recovery over the past two years following the impacts of COVID-19, although those gains have not come without costs. The Federal Reserve has been raising interest rates in the hopes of tempering elevated inflation, hindering growth. Consumers will be highly circumspect this year, while businesses have already responded to the anticipated drop in spending by re-evaluating staff levels.
This year will likely feature a period of net job loss and a period of new hiring, resulting in overall muted employment creation that fails to keep pace with the growth of the labor pool, translating into higher unemployment. The labor market could also contract more meaningfully if high inflation is protracted, the war in Ukraine escalates, financial markets become more volatile, or another black swan event occurs.
National Apartment Overview
Historic performance during the pandemic and production delays in 2022 led to an all-time high delivery slate for the apartment sector this year, creating a confluence amid waning apartment demand. This combination will push vacancy up and slow rent growth, but the longer-term outlook is bolstered by demographics and barriers to homeownership.
The national affordability gap, the difference between the monthly payment on a median-priced house and average apartment rent, doubled last year as decade-high mortgage rates compounded elevated single-family home prices. Once economic headwinds abate, these barriers to homeownership will direct more residents to apartments and encourage tenants to rent longer into their lives.
After being exceedingly accommodative during the pandemic, the Federal Reserve rapidly tightened monetary policy last year in order to combat elevated inflation. The shear speed and magnitude of these changes have placed financial markets in a place of discontent as financial organizations, regulators and investors are working to adapt to the new environment.
Lenders are taking a more cautious approach overall, with a heavy emphasis on debt service coverage, ensuring that operating incomes can cover debt costs. Conditions should improve over the course of the year, however, and once the Fed settles on rates, the bid-ask spread among investors should start to narrow, allowing lenders to more accurately determine valuations.
As Property Performance Normalizes, Demographic and Supply Factors Play Pivotal Roles in Rankings
Favorable demographic trends act as a backstop for leading metros. Major markets in the Sun Belt dominate the top ranks of the National Multifamily Index for 2023. While not immune to the various economic challenges facing the country, these metros have key demographic drivers that bolster their outlooks this year. Net in-migration to most major Florida metros is on an upward bend, as a warm climate and lower costs appeal to residents and employers alike. Fort Lauderdale and Orlando boast nationally high rates of hiring, household creation and rent growth, earning these metros the number one and three spots, respectively. Similar migration trends and a high preponderance to rent place Dallas-Fort Worth in the second spot, with Austin (#6) and Houston (#8) also ranking highly. One or more of these factors are at play in the high positioning of Atlanta (#7), Charlotte (#9) and West Palm Beach (#10) this year as well. Resilient performance post-pandemic comes with a caveat, however. Phoenix (#11), Jacksonville (#12), Salt Lake City (#13) and Raleigh (#15) all lie short of the top 10, due to substantial new construction that outweighs their favorable demographics in the short term.
Elevated development, tepid job growth characterizes lower-ranked metros. Leading the middle third of the Index, Denver and San Diego sit in the 19th and 20th spots, aided by less new supply pressure. The fastest pace of inventory growth nationally, meanwhile, constrains Nashville (#28) nearer the bottom of this cohort, despite strong rent growth over the past three years. At the midpoint of the Index, Oakland (#26) is joined by Washington, D.C. (#27) and New York City (#29) as primary markets that have improved their positions since last year as delayed pandemic recoveries became more apparent. San Jose (#30) and San Francisco (#32) fall slightly lower, due to challenges in the technology sector. A quiet employment outlook also positions several markets in the last third of the Index. In many ways this cohort is the inverse of the leaders, with lagging household formation but tempered construction. Job attrition places New Haven-Fairfield County (#47), Boston (#48), Cleveland (#49) and Pittsburgh (#50) at the bottom of the Index.