By: Ryan Wynkoop, Investor Relations Manager
Latest reporting has shown inflation having recently dropped, but the housing market is one of the sectors that continues to remain elevated. With the housing market elevated, these higher than normal real estate prices often mean home ownership is unattainable for many Americans. This is because home prices are rising faster than wages in more than 90% of the nation, according to Ashcroft Capital’s Q2 2023 Real Estate Market Report. These rising housing prices suggest it’s a wise time to consider investing in the multifamily housing market.
In our Q2 2023 Real Estate Market Report, the company analyzes current multifamily housing trends, and highlights how you can best understand ways to maximize opportunities in the existing market. Additionally, this report forecasts what you can expect from multifamily construction and the investment opportunities through the rest of 2023. Read on to glean insight into the benefits of investing in multifamily real estate, current multifamily trends, and the current state of the multifamily housing market.
- 2023 anticipates a peak in new multifamily construction in many areas of the country.
- Fannie Mae anticipates that the national vacancy rate may rise to 6% in 2023.
- There is an influx of high-income individuals in the rental market due to higher home values. Multifamily tenants with monthly incomes of up to $10,000 are choosing to rent in multifamily buildings.
- Capitalization (cap) rates slowly declined at the end of 2022 to 5%.
- Inflation remains top of mind for many Americans, and the Federal Reserve continues to raise federal funds rates to help lessen the impacts of inflation, though some predict that the Federal Reserve will stop raising funds in 2023.
- While mortgage rates have slightly decreased, homeownership is still unaffordable for many, as home prices are rising faster than wages in more than 90% of the nation.
- Despite inevitable challenges, Ashcroft Capital has a positive outlook for the multifamily market and investment opportunities in 2023.
- We maintain open communication with our network of owners and brokers and will continue to maintain transparency through investment memos for each new multifamily asset that goes under contract.
- With the country’s housing shortage, investing in multifamily real estate is considered a wise opportunity for new and existing investors.
Rental Growth and New Construction
This year anticipates a peak in new multifamily construction in many areas of the country. The multifamily construction industry expects to see 300,000 new multifamily units completed across the United States in 2023. This volume is expected to result in a record-high supply of available units. Because of this supply volume, Fannie Mae anticipates that the national vacancy rate may rise to 6%. ApartmentList.com explains that this quantity of apartment units under construction can help keep rental prices in check this year, amid a housing affordability crisis that is currently affecting single-family home ownership.
In Q1 of 2023, the national average for apartment rent was $1,708 per month. This monthly rent average is an increase from 2022. Furthermore, 2023 will likely see further multifamily rent increases, with projected growth upwards of 4 to 5%.
Despite the record-high multifamily construction volume, developers continue to experience the delays that have plagued the construction industry since the Covid-19 pandemic began. From difficulties securing materials to delays in the building permit process, construction progress depends on factors that are often beyond control. These delays may continue throughout 2023, possibly impacting the anticipated peak in available multifamily units.
Being a renter no longer has the income parameters it historically did. High-income individuals continue to infiltrate the rental market. This trend began in 2021 and remains steady. The introduction of 2020’s higher home values introduced high-income multifamily residents to the rental market. In Q1 of 2023, the average monthly income for multifamily tenants approximated $7,000. Currently, multifamily tenants with monthly incomes of up to $10,000 are choosing to rent in multifamily buildings. This income level is up from 2016 through 2020, where the monthly income for renters was below $8,000. Ashcroft Capital’s Q2 2023 Real Estate Market Report anticipates rent growth to remain positive through 2024.
However, while paychecks are increasing at the highest rate among lower-skilled workers, home prices are rising faster than wages in more than 90% of the nation. This wage gap is putting homeownership out of reach for many individuals, making the rental market an appealing housing option.
Approximately 300,000 multifamily units are expected to come online this year across US markets. This is a significant uptick from 2022 and would be a record high for apartment completions. According to Fannie Mae, it is expected that the amount of new supply completed over the next 12 months will push the national vacancy rate up to 6% in 2023. The increasing multifamily supply, softening labor market, and potential midyear rebound in single-family activity could help recalibrate the housing market and bring the multifamily metrics closer to long-term averages.
For example, Texas is currently experiencing the highest volume of new multifamily construction. Austin, Dallas, and Houston are the significant metros that led the country in multifamily construction volume, according to MultiHousingNews.com. Austin holds the spot for the metro with the fastest pace for the past six years. Focusing on Dallas–Fort Worth (DFW), Ashcroft Capital has had a strong relationship with the booming Texas metroplex since the company’s founding. In total, Ashcroft owned 32 properties in DFW and still has 18 in our portfolio, making it our most frequented market to drive investor returns.
On the other hand, rental rates are experiencing month-over-month growth, particularly in the Sun Belt Markets. Ashcroft Capital’s overall portfolio has a strong presence in a number of submarkets throughout the Sunbelt such as Texas, Georgia, Florida, and North Carolina. These southern markets continue to exceed the national averages.
Frank Roessler, CEO and co-founder of Ashcroft Capital, shared with Multi Family Executive that Ashcroft Capital believes there may be interesting multifamily opportunities for Ashcroft Capital in the Sun Belt over the next year to year and a half.
Inflation remains at the forefront for many Americans. Despite the recent drop in inflation, prices remain high in the housing sector. The Federal Reserve continues to raise federal funds rates to help lessen the impacts of inflation. However, with the possibility of an anticipated moderate recession later in the year, some predict that the Federal Reserve will stop raising funds in 2023. The current federal funds rate is 5.25%, which may drop at the end of 2023. With an anticipated drop, multifamily real estate interest rates may also decrease, making it an attractive investment for multifamily investors.
Capitalization (cap) rates slowly declined at the end of 2022 to 5%.
The cap rate formula is a property’s annual net operating income (NOI) divided by the property’s market value. The cap rate assesses the property’s returns in a one-year period.
According to CBRE, the average multifamily cap rate was approximately 4.49% at the end of 2022. This number is higher than it was pre-Covid-10 pandemic.
While mortgage rates have slightly decreased, homeownership is still unaffordable for many Americans because it is a seller’s market with high home values. However, Fannie Mae forecasts that the 30-year mortgage rate will decrease from 6.5% at the beginning of 2023 to 6% by the end of the year. Likewise, Freddie Mac’s average 30-year mortgage rate was 6.6% in early 2023 and it anticipates mortgage rates will drop to 6.2% later in the year. The Mortgage Bankers Association predicts that average mortgage rates will be around 5.7% during 2023, which is down from the 30-year mortgage rate of 6.2% for Q1 2023.
Despite a shifting market and the challenges that come with it, we have a positive outlook for the multifamily real estate market and investment opportunities in 2023. In the first half of 2023, the amount of dealflow and transactions has been markedly slow, as pricing discovery has been emerging. In the second half of 2023, we anticipate additional dealflow and transactions, creating more buyer confidence and resurgence in investment opportunity.
We maintain open communication with our network of owners and brokers and will continue to maintain transparency through investment memos for each new multifamily asset that goes under contract.
Roessler says, “I think multifamily is poised to attract strong investor interest over the long term. Whether going through a rent-growth plateau or even a slight decline, the fundamentals remain very strong compared with other asset classes.”
Roessler continues, “The current cost of buying a home in a time of higher interest rates will support apartment demand, and the impact of a recession on renter demand could be relatively minimal.”
The multifamily real estate market is adjusting alongside the economy. The cap rates have risen since 2021 and prices are higher. With the country’s single-family housing shortage and home ownership being unaffordable for many Americans, investing in multifamily real estate is considered a wise opportunity for new and existing investors. In fact, according to Colliers 2023 Global Investor Outlook Report, multifamily apartments are the top asset choice in America. With a new wave of multifamily developments expected to emerge at the end of 2023, attractive multifamily acquisition opportunities may come on the market.
Scott Lebenhart, chief investment officer at Ashcroft Capital, shared with Multifamily Insiders that while the pace of multifamily building sales will continue for the foreseeable future, multifamily properties will likely become an investor favorite.
To learn more about investing in multifamily apartments or for IRR and cash-on-cash projections, visit https://info.ashcroftcapital.com/fund or schedule a call with our Investor Relations Team at firstname.lastname@example.org.
- Duggan, Wayne. “The Price Is Right: U.S. Inflation Hits Two-Year Lows In May” Forbes. June 13, 2023. https://www.forbes.com/advisor/investing/current-inflation-rate.
- Betancourt, Kim. Komosa, Tim. “Multifamily Economic and Market Commentary” Fannie Mae. January 2023. https://www.fanniemae.com/media/46096/display#:~:text=That%20said%2C%20the%20national%20multifamily,in%20the%20forecast%20in%202024.
- Salviati, Chris. Warnock, Rob. “Sun Belt metros lead apartment construction boom in 2023” ApartmentList.com. March 13, 2023. https://www.apartmentlist.com/research/sun-belt-metros-lead-apartment-construction-boom-2023.
- Michael Griffin, Michael. McCunney-Thomas, Patricia. “Contractors continue to face myriad challenges in 2023” HKA.com. March 15, 2023. https://www.lexology.com/library/detail.aspx?g=3b4cda87-570e-4b2e-b85b-5e2faa61677c.
- Gagiuc, Anca. “Top 10 Markets for Multifamily Construction” Multi-Housing News. May 18, 2023. https://www.multihousingnews.com/top-markets-for-multifamily-construction.
- MFE Staff. “Q&A With Frank Roessler of Ashcroft Capital” Multifamily Executive. June 1, 2023. https://www.multifamilyexecutive.com/business-finance/business-trends/q-a-with-frank-roessler-of-ashcroft-capital_o.
- Bankrate.com. “Fed Funds Rate.” Bankrate.com. June 27, 2023. https://www.bankrate.com/rates/interest-rates/federal-funds-rate.
- JPMorgan.com. “The role of cap rates in real estate.” JPMorgan.com. November 1, 2022. https://www.jpmorgan.com/insights/real-estate/commercial-term-lending/cap-rates-explained.
- Barkham, Ph.D., Richard. “Underwriting Assumptions Exceed Pre-Pandemic Levels for Prime Multifamily Assets” CBRE. January 13, 2023. https://www.cbre.com/insights/briefs/underwriting-assumptions-exceed-pre-pandemic-levels-for-prime-multifamily-assets.
- Lebenhart, Scott. “Apartment Investment Sales Will Rebound in Time.” Multifamily Insiders. April 24, 2023. https://www.multifamilyinsiders.com/multifamily-blogs/apartment-investment-sales-will-rebound-in-time.