April 25, 2023
In the midst of recent concerns over the banking sector, multifamily fundamentals have remained strong. U.S. asking rents increased in March for the first time since fall 2022, despite the economic slowdown induced by the Federal Reserve and a series of bank failures.
The first quarter of 2023 saw no gains in multifamily rents for the first time in a decade. However, this comes as a relief, as demand held up well in light of the attention on the economic slowdown and the deceleration from the rent gains of the previous two years. Rents and occupancy remain stable as the market moves into the growth season.
Given the growing affordability concerns and high inflation constraining consumers, it is likely that rent growth in 2023 will be modest. However, a multifamily hard landing is not imminent, as household formation continues to be supported by the tight job market, high single-family home prices, and mortgage rates keeping homeownership out of reach for some renters. Consumer balance sheets remain strong for the time being. The main question is how the economy will respond to sharp interest rate increases.
The Federal Reserve has three choices, according to Mohamed El-Erian, Chief Economic Advisor at Allianz and former CEO at PIMCO: to cause a sharp recession by slamming the brakes on the economy, to change the inflation target to a number above 2%, or to ease up on rate increases and promise inflation will return to 2% while waiting to see if the economy stabilizes at 3-4% inflation. El-Erian advises policymakers to implement intelligent infrastructure spending, pro-growth tax reform, policies such as funding childcare to increase the workforce, and more public-private partnerships.
Despite challenges, El-Erian emphasizes the strength of the U.S. economy and labor market, predicting that the current crisis will be navigated with minimal damage. "It will be a bumpy ride, but we will end up in a better place," he said.
With demand remaining firm, multifamily rents experienced a slight increase in March. The average U.S. asking rent rose by $3 to $1,706. Year-over-year growth fell to 4.0% nationally, which is 90 basis points less than February and the lowest level since rents started their unprecedented climb in April 2021.
Although financial markets remain volatile due to the collapse of several banks, multifamily property fundamentals are stable. Rents and the national occupancy rate were unchanged during the first quarter of 2023, with 21 of the top 30 Matrix metros recording rent gains in March.
Single-family rental rates increased in March by $5 to $2,079, while the year-over-year increase fell by 80 basis points to 2.8%. Occupancy rates decreased in February by 10 basis points but remain strong overall.
In conclusion, U.S. multifamily rents have resumed growth after a five-month pause, demonstrating resilience in the face of economic uncertainties.