National Multifamily Index (NMI)

• 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.

National Economy

• 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.

Capital Markets

• 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.

Investment Outlook

• While elevated rent growth helped deals close last year, those projections are slowing now, and the expectations gap between buyers and sellers has widened to a point that many transactions have not been able to move forward. More stable interest rates closer in line with historical levels should help to narrow that gulf moving forward, as investors gain confidence in the new landscape.

• Many multifamily investors have entered 2023 in a defensive posture, with a selective mindset toward potential transactions. Those that feel interest rates could climb further may wish to execute on deals in the short term, while others may be willing to incur the expenses now, with an eye toward refinancing down the line. Nonetheless, there continues to be compelling motivations to buy or sell apartment assets.