National Multifamily Index (NMI)

• The wider adoption of remote work over the past three years boosted population growth among many already fast-growing Sun Belt markets, prompting a subsequent acceleration to groundbreakings that is now coming to bear. This scenario applies to several metros across the top half of the National Multifamily Index.

• In a year where many expanding markets are contending with prodigious new supply, some traditionally steadier markets are standing out. While these metros lack as robust net in-migration, comparatively modest construction aids fundamentals this year. Lower supply pressure and a high barrier to homeownership also underpin the outlook in several gateway markets.

National Economy

• Despite initial concerns, last year proved to be a robust period for the economy. This positive momentum will carry forward in 2024 as household net wealth has increased by a faster-than-average 33 percent since the pre-pandemic peak, well-eclipsing inflation. The cost of debt has risen dramatically over the past two years, however, constraining activity in both the residential and commercial real estate markets, and prompting businesses to trim expenses.

• Higher borrowing costs, together with rising operating expenses, could prompt employers to do more with less. Job growth is set to be around two-thirds the 2023 pace this year, or possibly lower if economic conditions temper more than expected. While a soft landing to the Federal Reserve’s tightening policies is still more likely than not, a miss-step would not be hard to take.

National Apartment Overview

• Positive momentum is gathering across the national multifamily landscape, yet vacancy and rent growth rates are not responding in kind. Developers, not to be outdone by last year’s record 420,000 units, are on track to open approximately 480,000 doors in 2024. Although this is likely the peak of the current cycle, it will take time for these units to be absorbed into the rental market.

• While supply pressure is high, so are today’s barriers to homeownership, due to both elevated mortgage rates and stubbornly-high sale prices. These factors will delay first-time home purchases for many current renters, expanding the rental pool.

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

• The Federal Reserve ended its aggressive 18-month hiking spree last July, holding the overnight benchmark rate flat at a 5.25 percent lower bound through the end of 2023. Going forward, the Federal Open Market Committee has not ruled out the possibility of additional policy firming, but it is widely anticipated by market participants that the Federal Reserve will ultimately cut rates at some point this year, if only modestly. This could foster a modest transaction activity revival in 2024.

• While capital is available for multifamily investment sales, underwriting criteria has tightened, and borrowing costs are high. Banks have prioritized debt held by existing customers, and many have chosen not to consider new loans as they restrain balance sheet outflows. As a result, investors have once again become highly dependent on lending from government-sponsored agencies. Borrowers familiar with the interest rate environment before 2008 may be more active this year.