The overall long-term picture for multifamily remains positive but Freddie Mac’s Multifamily 2024 Outlook notes there are still some short-term headwinds to contend with in the coming year. These include high supply and pressure on rent growth in some parts of the country like the Sun Belt and Mountain West regions.
As the economy moves from an uncertain 2023 into 2024, Freddie Mac states there should be more stabilized cap rates and property values. This trend could help drive transaction volume. Freddie Mac Multifamily expects volume growth to return next year, up to the $370 billion to $380 billion range. While that is well below the post-pandemic years of 2021 and 2022, it would be similar to 2019 volume.
The outlook projects an expected gross income growth of 2.1 percent for the year ahead. While demand is expected to remain positive, it will likely be weaker than pre-pandemic rates. Rent is expected to increase by 2.5 percent, slightly below the annual average from 2000 to 2002.
However, in some regions and markets where supply is higher, rents dropped in 2023. Sun Belt and Mountain West areas had some of the nation’s highest levels of new supply at 3 percent and 4 percent, respectively, causing rents to decline 1.4 percent and 0.5 percent, respectively.
Construction and supply
The construction pipeline is expected to be robust in 2024 with just under 1 million units being built and most of them delivering in the new year. However, some timelines will extend into 2025 due to construction delays which is likely to prolong the impact elevated supply has had on multifamily performance.
Despite a busy year for deliveries, vacancy rates are expected to remain relatively stable, resulting in stabilized cap rates property values, according to the report. The vacancy rate for 2024 is forecast at 5.7 percent, 40 basis points higher than the 2000 to 2022 average.
Markets with the highest supply ratio are Salt Lake City; Nashville, Tenn.; Austin, Texas; Charlotte, N.C.; and Colorado Springs, Colo. They are all expected to have a new supply ratio of 5.5 percent or higher.
Markets with the lowest new supply ratio are projected to be Tulsa, Okla.; Rochester, N.Y.; Long Island, N.Y.; Syracuse, N.Y.; and New Orleans, which will have a new supply ratio of 0.4 percent or less.
The outlook notes overall market performance will feel slow, especially when compared to the pandemic boom years and even the years prior to the pandemic beginning in 2020. In general, though, slower moving secondary or tertiary markets are generally expected to perform better in 2024.
Interest rates unchanged, but high
As the year ends, economic conditions appear to be moderating and there may be a soft landing after all. The outlook expects job, wage and GDP growth to slow but remain positive and inflation to continue to decrease.
However, Sara Hoffmann, director of multifamily research at Freddie Mac, said in a prepared statement there may still be a bit of a bumpy road throughout the next year, including continued higher interest rates. While it appears the Federal Reserve has finished raising interest rates this cycle, many economists expect the higher-for-longer interest rate environment to continue throughout 2024.
When the Federal Open Market Committee held its final meeting of 2023 last week, the Federal Reserve left interest rates unchanged for the third consecutive meeting after a year of steep increase. It’s unclear when rate cuts may come.
Also cause for concern for investors, the 10-year Treasury rate changes have been volatile in recent months. The report notes it moved between 3.5 percent and 4 percent for the first half of 2023, then increasing and peaking at nearly 5 percent in October. The rate has been just under 4 percent so far this week.
The report notes any additional cap rate increases will put downward pressure on property values. While the rate of property value decline slowed in the second and third quarters of 2023, valuations have declined 13.3 percent since the peak in valuations in the second quarter of 2022.
