Q4 2022 Multifamily Real Estate Market Report

Executive summary

When investing in any asset class, it's generally important to understand the macroeconomic backdrop.

The changes of 2022 saw this become even more important for investors, and there continues to be an outweighed influence on investor confidence in the commercial real estate market. Economic growth, inflation, unemployment, and interest rates all continue to influence demand for commercial space and the performance of real estate investments.

Since our last Q3 2022 Market Report, this macroeconomic picture has remained uncertain in the US with positive GDP growth (2.6% for Q3 2022) supporting the perspective of avoiding recession. However, inflation remains elevated with the Federal Reserve continuing to push the target rate - currently 3.78% versus 0.08% just twelve months ago.

The elevated interest rate environment has resulted in a dramatic slow down in the transaction activity of multifamily properties as buyers adjust valuations and potential sellers broadly hold their assets.  

With the anticipated dispositions schedules of multifamily owners delayed by current capital market conditions, opportunities for more opportunistic sales will emerge, and with increasing frequency the longer the market remains in flux. 

Global outlook mixed

Russia’s invasion of Ukraine, recent turmoil in China and the lingering COVID-19 pandemic all weigh heavily on the outlook. The IMF forecasts also highlight the mix of strong GDP growth and high inflation with:

• Global growth forecast to slow from 6.0% in 2021 to 3.2% in 2022
• Global inflation forecast to rise from 4.7% in 2021 to 8.8% in 2022

The key takeaway for multifamily is that this will continue to impact US fundamentals as unrest and uncertainty drive up the cost of goods through impacts on supply and logistics. 

The result has been upward pressure on inflation and interest rate hikes by the Federal Reserve in response, seeing elevated interest rates and lower transactions volume in the multifamily space.

US inflation remains high, home prices seeing declines 

While US GDP increased 2.6% for Q3 2022, inflation remains elevated at 7.1% year-over-year for the month ended November 2022.

The Federal Reserve has continued to push the target rate which has seen the housing market contracting nationally with higher mortgage rates of around 6.5% common for most buyers. This has led to lower buyers in the market and higher inventory levels seeing housing price declines in many markets.

Industry spectators expect this to continue into 2023:

• Economists at Goldman Sachs expect home prices to decline by around 5% to 10% from the peak hit in June 2022
• Wells Fargo has recently forecasted that national median single-family home prices will drop by 5.5% year-over-year by the end of 2023.

Multifamily market volumes down but fundamentals remain strong

With the global market uncertain and rapid changes in interest rates, transaction volume in the multifamily space has decreased significantly, however fundamentals remain strong.

In the market, HoneyBricks is seeing a bid-ask spread of 10% - 15% between multifamily buyers and sellers. 

Despite this, rent growth remains strong although the rate of growth is declining. According to a Yardi survey of 140 markets - the accelerated rent growth from the pandemic ended in September 2022, however the national average of 8.2% remains very strong.

HoneyBricks outlook

HoneyBricks continues to evaluate high quality real estate opportunities coupled with high interest in real estate tokenization, especially as hold periods are likely to stretch out from original business plans given the economic environment and demand for liquidity increases.

Investments selected for the HoneyBricks marketplace will continue to focus on fundamentals and broad market access presenting HoneyBricks investors high quality, low volatility investments.