Paula Munger’s View: What to Expect for Multifamily in 2023

January 21, 2023

In a recent interview with the NAA Paula Munger shared her thoughts about where the multifamily industry is right now, its progress in the prior year, and what may lie ahead in the upcoming year of 2023.

As always, despite the challenges that multifamily has faced over the years, the industry continues to thrive and has a great outlook for the future.

Top Takeaways From 2022

The beginning of 2022 started out strong, but as the third quarter began everybody began to see the effects of inflation, interest rate increases, and concerns over the state of the economy.

  • Inflation
  • Rising interest rates
  • Economic concerns
  • Significant leasing decrease
  • Negative absorption

Due to the changes and the possibility of a more negative impact, there has been a need for some moderating of the market.

Results of the Housing Supply Action Plan

The housing supply action plan is an initiative that is supposed to lessen some of the harsh restrictions of zoning laws so that more rental housing can be built.

It is too early to tell whether or not there has been a significant change, but it does seem to be a step in the right direction and the multifamily industry is looking forward to seeing an improvement.

Increased Mortgage Rates

As mortgage rates steadily increase there is a fear that prospective buyers may not be as willing to buy properties. Another issue with mortgage rates is that the big construction boom seems to be slowing down.

In fact, companies like Fannie May are predicting large drops in construction production at the beginning of 2023, as much as a 29% decrease.

Although it looks like there may be a rocky beginning of the year, there will most likely be a record of a multi-decade-over-decade of completions that could be between 430K to 500K units.

Even though the numbers look good, and could even break records, there may be a decrease in those numbers in terms of construction.

Barriers to Building for Developers in 2023

Some of the other barriers that builders may run into in the year 2023 could be:

  • Labor market
  • Not enough skilled workers
  • Decreases in material
  • Strict regulations from the government

At the moment there seems to be a greater number of job openings than the number of hires. What this means is that there is a shortage of qualified laborers available.

In addition to the struggling labor force, the increased costs of goods and services across the United States are expected to end up in a shortage of materials to build with. Fewer materials and higher costs are going to be challenging throughout the year.

Experts believe that there will be an increase in regulations for construction sites that will hinder the progress of all projects.

Household Formation and Apartment Demand In 2023

We actually saw a decline in household formation for renters in the 2nd and 3rd quarters of 2022, with around 577,000 fewer occupied renter households. However, the decrease came after the post-pandemic boom starting in 2020.

While people started moving back out of their parent’s homes and into their own apartments when the world began to reopen after the pandemic we saw a spike in household formation, however, due to rising costs and uncertainty with inflation there is the possibility of a recession on the rise.

Factors to Fuel Apartment Demand in 2023

Although a recession is likely to occur there is no indication that it absolutely will happen. If there is no recession we have a large number of Generation Zs and Millenials to keep in mind for the housing market.

Although there are some Millenials that are looking to buy homes, most of them are not in a position to buy at this time so they will have to rent for the time being. As more young people seek to break away from their parent’s homes there will be significant apartment demand in the year 2023.

Areas in the US With Higher Demands

Although there may seem to be a decline in the sun belt, it is an appealing choice for people because there is better weather and can tend to be more affordable.

Since people are going back to the office for work more and more, but only a couple of times per week, the suburbs may tend to have a higher demand because it is nicer to live there than downtown, and people tend to be able to tolerate longer commutes if they only have to do them a few times per week.

4.3 Million New Units by 2035?

With threats of a new recession on the horizon, it may look like the goal for 4.3 million units to be in place by 2035 could be in jeopardy. The truth is that 2035 is a long way away and a lot can happen between now and then, however, it looks like the number could be short.

There may be years ahead that top out at 300K new builds, and others that top over 500K new units. It is very probable that the goal will be met and the demands will be satisfied, however, this is all based on the demands of now.  The demands of the time could be more or less.

Continual Rising Interest Rates

It is hard to predict what the federal government will do year after year. Over the year they may continue to slowly, but gradually increase interest rates until they top out and level off. Of course, increased rates will have an effect on every aspect of the multifamily industry, and it could even slow down construction for a while.

Affordability Issues

Of course, there will be issues with the affordability of rent and the cost of living. However, there are programs and incentives for people across the country. California is cracking down on its affordability policies and taking steps to create more affordable housing.

Other states are implementing tax credits and other financial incentives so tey can increase the supply of affordable apartments.

Optimizing Multifamily Business for 2023

One of the main things that business owners are going to have to look at over the next year is cutting costs. One of the trends in cost-cutting practices that is up and coming is the use of technology to cut down on labor costs.

Instead of paying for tours, many of these practices can happen virtually and over the internet.

Besides cutting costs it will be almost necessary to add costs to tenants and visitors by adding parking fees. Some residents are willing to pay for convenience services so it could be a good idea to offer some services that people will pay for.

In addition to cutting costs and implementing other streams of revenue owners and operators are partnering with short-term rental platforms and that helps boost income as well.

2022 vs. 2023

The year 2023 will be much like the year 2022 in terms of how the beginning of 2022 started off slow, but steadily got better as numbers improved through the third and fourth quarters. 2023 will start off a little rocky. There will be inflation and fears about the security of finances as well as a possible recession. However, as the year goes through its trials the market is probably going to look really good toward the last quarter of the year.

Although there is no way to actually see the future, based on the way events have happened in the past, there is a good chance that this sector will survive any recession and remain as strong as ever.