There's a large wave of multifamily inventory coming across the country, but it won' t be enough to keep up with demand.
A new study from CBRE forecasts a "near-record" 716,000 new multifamily housing units will hit the markets over the next two years, with most of the activity centered on areas that have benefitted from large demographic shifts - the Sun Belt and Southwest in particular. They predict the new supply could expand the nation's total inventory by 4.2% and push the sector's vacancy rate to 5.2% by the end of 2023, slightly above it's historical averages.
The new inventory won't be enough over the long term.
The report adds: "Even with a surplus of multifamily units over the short-term, CBRE forecasts that an additional 2.3 million new units will be needed nationwide to maintain healthy market fundamentals over the next 10 years." Even after all existing projects are deliver, the analysis predicts that an additional 200,000 annually to maintain supply/demand equilibrium.
Construction Delays Could Complicate Matters
Additionally, with the potential for delays in construction projects due to labor shortages and tougher lending conditions, it's possible that the impact on vacancies could be limited, as their chart illustrates:
The sector has been facing some stiff headwinds for the past several quarters, but that's expected to change. CBRE expects demand will turn positive in the first half of the year, leading to moderate rent growth.
"We forecast rent growth of 3.5% for the year, down from 6.7% in 2022 and 13.4% in 2021 but still relatively healthy when compared with the long-run average of 2.5%." - CBRE
With the uncertain economic conditions and increased inventory, it would be reasonable to assume that bad debt and delinquencies would be on the rise. However, it appears that renters are in better financial shape than you might assume as rent collections climbed to over 96% in February, the highest levels since March 2020. In Class B properties specifically, rent collections clocked in at 96.8%.
Obviously, changes in the job market could impact these figures if job losses expand in a meaningful way, but at the moment this is a welcome development.
Private Equity Real Estate Will Lead the Way
Another new report from the New York Fed highlights that high housing demand exists across property classes, and that private equity real estate will play a critical role in helping to meet demand through until preservation in addition to new construction.
The report finds that "most respondents anticipate raising more equity in the next 12 to 24 months than they did in a roughly five-year period ending in August 2022" and that they plan to quintuple their investments in new projects over the next 12 to 24 months.
We (obviously) continue to believe multifamily real estate remains a great investment vehicle over the long term (that's why we recently launched our the new Blue Lake Multifamily Fund), and feel that our focus on Class B value add properties will benefit from the development surplus of new construction units.
As the overall rent profile of a market grows, a rehabilitated, recent vintage property will have more room for rents to grow as people look for affordable options that still have the amenities they want.
There's a near-record amount of multifamily inventory set to hit the market, but demand will quickly absorb the new units and we'll continue to need new supply for the foreseeable future.
A lot of the construction is focused in high growth areas where we've been seeing large demographics shifts, particularly in the Sun Belt and Southwest.
In the short term, vacancies could be slightly impacted, with a report from CBRE predicting it to rise to 5.2% by the end of 2023. That's only slightly higher than historical figures.
After 3 quarters of negative net absorption, demand will turn positive in the first half of '23 and limit how much the increased vacancy rate might impact rent growth.
CBRE is forecasting rent growth of 3.5% in 2023, a far cry from the double digit growth we saw during the pandemic, but still above the long term averages.
After all of the new inventory hits the market, there will continue to be a need for 200,000 additional units annual to keep up with demand.
Market cycles are healthy and, despite the short term challenges, it's clear that demand will rebound, the strong markets we focus on will continue to grow, the fundamentals of the sector will stabilize, creating a strong foundation for the next growth cycle.
We're keeping our deal flow active, we'll be ready to capitalize on the growth phase, and we'd love to have you join us.
As always, Be Bold, Be Great and Keep Pushing Forward!
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About Ellie Perlman
Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.