According to Apartment List, 67 of the nation’s top 100 most populous cities have seen negative year-over-year rent growth as of July 2023. But as recently as late 2022, depending on the market, observers were predicting that year-over-year (YOY) multifamily rent growth would remain above average—either way, still landing squarely in positive territory. We were the dissonant voice in that chorus: Multilytics, our proprietary suite of machine-learning models, had been projecting since late 2021 that YOY rent growth in Class A multifamily buildings would turn negative.
In December 2022, we published our top 10 predictions for 2023, which included negative multifamily rent growth. As far as we are aware, we were the only market observer forecasting negative rent growth at that time. And early this year, we published the Multilytics Rent Forecast for January 2023 to January 2024, putting percentages to the predictions for our target markets.
We have relied on Multilytics to add critical, data-driven dimension to our study of submarkets down to the property level. With our February report, we put a stake in the ground to make its predictions public. With our newly released report, Multilytics Rent Forecast Accuracy Report January to July 2023, we benchmark the results—a public confirmation and commitment to be accountable to our investors.
Multilytics’ Accuracy on Rent Growth Speaks for Itself
To say that we are proud of the results is an understatement. We believe that Multilytics provides the most accurate predictions of rent that is commercially available, and that we outperform other market observers in terms of accuracy. Multilytics predictions published by Origin Investments are not retroactively updated to minimize error. If the prediction changes, new figures are published, but we do not update or hide our previous predictions to sync with market drift.
And the numbers speak for themselves: Of our target markets, five came within $15 of the prediction; nine came within $55; one, Colorado Springs, recorded an average YOY rent deviation of $91.48, 6.01% from our prediction. We expect reality to converge with our forecast in the second half of the year, as we had predicted that any month-over-month summer rent growth would quickly recede. In all cases where the forecast deviated, market rents were lower than estimated. Put another way, six of our target markets recorded an average deviation within 1% of the point estimates.
The Multifamily Markets Covered in Our New Report
This report compares our predictions with actual rent data in the following areas:
- National, regional and gateway markets
- Origin’s 15 investment markets: Austin, Dallas, Houston, San Antonio, Orlando, Tampa, Jacksonville, Nashville, Charlotte, Raleigh, Atlanta, Colorado Springs, Denver, Phoenix and Las Vegas
Compared with several other market observers making similar estimates, our predictions were the most bearish. Take Austin: In February, we predicted YOY rent growth to fall to 1.17% over the next six months. Actual data showed that we were off by 3.07%. But other market observers believed that YOY rent growth would remain above 6%—well above average—in Austin throughout the year.
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What’s Ahead for the Multifamily Market?
Negative YOY rent growth is emerging as multifamily real estate developers and investors deal with a host of challenges. The COVID-19 pandemic accelerated migration to lower-cost, tax-friendly and warm-weather states, even as it disrupted construction material supply chains. Buyers confident that rising rents would cover their low-cost debt fueled an overheated market for multifamily. But rising inflation in early 2022 kicked off a drumbeat of interest rate hikes that is expected to reverberate into 2024. Now, projects begun in more optimistic times are pinched by rising operating expenses and the contraction of high-cost credit.
We believe the current environment is a difficult correction necessary to encourage longer-term health in multifamily. While these periods are unsettling, their relative rarity speaks to the strength of multifamily housing as a long-term investment. In November, we will provide a full-year rent growth outlook for 2024 based on Multilytics’ insights, but we believe our target markets will return to positive territory next year.
At Origin, we have anticipated and prepared for negative rent growth since late 2021. Guided by our conservative approach to risk management and the expertise of our experienced deal managers, we are positioned not only to navigate this challenging environment but to seek out emerging opportunities in credit and preferred equity.
