Since December 2018, I’ve made predictions about what the coming year would bring for multifamily real estate investment. And each year I add up my hits and misses—an exercise I take seriously because it demonstrates two principles we value above all else: our expertise in multifamily real estate and our straightforward communications with investors. Both of those things, along with our commitment to rigorous analytics, disciplined asset management and precise project assessments, benefit our real estate Funds’ investments and returns.
This year we published the 2024 edition of our top 10 predictions—our sixth. This scorecard, for our top 10 predictions for 2023, is our fifth. And it’s the first time I got an item completely incorrect, due to unprecedented economic moves by Congress and the Federal Reserve. Despite this curveball, we scored 9 out of 10, for an overall average of 93% accuracy since I began making predictions. With that, here’s our assessment.
Prediction 1: A recession is coming.
What we said: There’s nearly a 100% likelihood of a recession in 2023, and it will be quite different than the brief one we experienced during the COVID-19 pandemic. I timed it beginning in October 2023 based on Origin’s Multilytics℠, our proprietary suite of machine-learning models, and other factors.
What happened: The confluence of substantial fiscal stimulus in 2023 due to the infrastructure and semiconductor bills, and Congress’s continued spending even as the Fed tried to rein in inflation with rate hikes, kept the economy resilient against all odds. In December 2022, seven of 10 respected economists in a Bloomberg survey predicted a 70% chance of a 2023 recession by fall—so rather than being flat-out wrong, many of us were early. I believe we will see that recession in the second half of 2024, and its depth and breadth will depend on the Fed’s actions and whether Congress intervenes with more stimulus.
Prediction 2: Multifamily rents will enter negative territory.
What we said: Multilytics showed that more than half our target investment markets will see negative rent growth in 2023, which is a consistent warning sign of a recession. Given double-digit rent growth percentages in 2021 and 2022, anticipated falling salary increases, growing inflation and rising interest rates, a correction is necessary. Additionally, the high number of new apartment units scheduled for delivery in 2023 will put further downward pressure on rents.
What happened: From September 2022 through 2023, average monthly rent growth fell and negative rent growth occurred in some markets, as predicted by Multilytics. Declines varied by region, with municipalities the West and South experiencing the greatest losses. To our knowledge, we were the only manager to publicly predict negative rent growth in the Class A multifamily market (see our Multilytics Rent Forecast January 2023–January 2024).
Prediction 3: Inflation has peaked and will decline to around 4.5%.
What we said: The high inflation we saw in 2022 will stick around in 2023 but eventually fall to about 4.5% over 2023, with one caveat: Wage inflation would also stick around, contributing to lingering inflation.
What happened: Throughout 2023, inflation has fallen from 6.41% in January to 3.24% in October (the latest statistic available at publication). The average rate for 2023 to date is 4.32%, which is very close to my predicted 4.5%.
Prediction 4: Wage inflation will persist.
What we said: The low unemployment rate, combined with big imbalances in the labor market, will be dwarfed by demand in blue-collar and service-sector industries. This will be exacerbated by workers’ efforts to unionize.
What happened: Real wages have grown this year—a trend likely to continue due to a tight labor market and more. Labor market “tightness” varies significantly by industry but cooled a bit in 2023, the St. Louis Federal Reserve concluded in November. As of August, however, it was still 32% higher than December 2019, right before the onset of the pandemic. While the professional, businesses services, accommodation, health care, social assistance and food services industries are contributing the most to this issue, according to the Fed, demographics also play a role: The population of workers 60 or older is expected to double to 22% from 12% by 2050. Combined with declining birth rates, this will lead to long-term workforce worries with structural talent gaps, Fortune noted. Private industry wages and salaries rose 4.5% over fiscal 2023, according to the U.S. Bureau of Labor Statistics.
Prediction 5: Interest rates will keep rising.
What we said: As long as inflation persists at the wage level, interest rates will remain high in 2023. They climbed aggressively in 2022 to mitigate the effects of 40-year inflation highs, and the Federal funds rate, which guides overnight lending rates, will continue beyond its current 4% or so up to at least the 5%-to-5.25% range, sending 30-year mortgage rates north of 8%.
What happened: The Fed funds rate, a key tool for guiding U.S. monetary policy, was 5.25% to 5.5% at this writing, and the 30-year fixed mortgage rate was 8.056%. While the markets expect the Fed has stopped raising rates and will start cutting them in 2024, at the end of November Richmond Fed President Tom Barkin said hikes are still on the table if inflation doesn’t continue to ease.
Prediction 6: Cap rates will go higher.
What we said: In 2022, cap rates were hovering around 4.25% to 4.50%, up from 3.30% to 3.50% in 2021. That 100-basis-point increase is surpassed by borrowing costs that increased by 250 basis points over the same period, creating negative leverage depending on the deal. This isn’t sustainable, and there are two possible ways forward: that borrowing decreases and cap rates don’t need to move, or that cap rates increase enough to overtake borrowing costs—but we already know that any increase in cap rates won’t be due to rent growth.
What happened: Multifamily cap rates, which vary from market to market and even property to property, rose to 5.2% nationally in Q3 2023, driven by the rise in borrowing costs, uncertainty around monetary policy and the lack of properties on the market.
Prediction 7: Distress is coming to the market.
What we said: Low interest rates combined with other factors in 2022 will incentivize overpaying for value-add and ground-up multifamily investment properties at double-digit percentages over replacement costs—just as they did in 2021. It hasn’t made sense to us to take similar risks; we haven’t bought an existing, rent-producing building in nearly four years.
What happened: Many who bought multifamily investment properties in 2021 and 2022 overpaid and overleveraged their purchases with floating rate loans. At the same time, rent growth has retreated. From Q3 2023 through 2025, a record number of commercial mortgage-backed security (CMBS) multifamily loans will come due, and overleveraged investors trying to refinance are finding that their deals no longer work at today’s higher mortgage rates. We are starting to see multifamily investment opportunities to buy assets well below replacement cost and are actively exploring this generational opportunity.
Prediction 8: Opportunities for investors will emerge in preferred equity.
What we said: Since multifamily investment rental rates will experience negative growth in 2022, why should someone invest in this asset class before 2024? The opportunities for the next six to 12 months will be in preferred equity because it is a well-protected position in the capital structure.
What happened: Throughout 2023, Multilytics has been forecasting little to no rent growth and high replacement values for multifamily investment, which means it would cost more to buy an existing property than to build a new ground-up development. As noted above, we haven’t purchased an existing rent-producing property since 2020 because we did not see margins large enough for healthy returns. Limited to negative rent growth this year played into this issue, as many renters prefer new construction. We continued to invest in preferred equity and common equity new construction deals rather than common equity in existing properties.
9: The build-for-rent segment will boom.
What we said: Build-for-rent (BFR) housing, single-family or townhouse-style homes are developing big momentum in multifamily investment as demographics shift and interest rates keep prospective buyers out of homeownership. As new households form that include more work-from-home employees, older empty nesters and younger families with children, these groups can find housing with several bedrooms, larger floor plans and yards in the BFR space.
What happened: With skyrocketing home prices, high interest rates that have reduced the number of credit-worthy buyers and a shortage of affordable houses on the market, BFR has become the go-to option for those who want more space, outdoor access, financial flexibility and the ease of renting. This has been especially true for millennials and Gen Z who may be paying off college loans and starting families. And it explains why BFR’s construction rate increased 50% from 2018 to 2022. It may have slowed a bit in 2023 as housing starts fell due to oversupply, Fixr’s Build-to-Rent Homes Report 2023 noted, but it is expected to bounce back quickly in 2024 and 2025.
10: Multifamily fundamentals will gain momentum in 2024.
What we said: Despite a mixed bag of predictions in 2023, multifamily housing will move through negative rent territory and slowing construction starts quickly. Multilytics shows that rent growth will generally reverse in 2024 into positive territory, and 2025, 2026 and 2027 will be very strong years. Construction starts will also return to much higher rates because the U.S. is underhoused by up to 4 million units—depending on which study you look at—a problem exacerbated for years by the Great Recession.
What happened: This holds true. Apartment List’s December 2023 Rent Report showed November marked the fourth month that multifamily properties saw negative growth, with national median rent down 0.9% month-over-month and year-over-year growth at -1.1%. But despite this cooldown, national median rent is still almost $250 higher than it was three years ago, the report noted. The significantly lower number of starts in 2023 is expected to solve the oversupply issue; absorption, apartment demand and rent growth will catch up based on the economics of each market. For example, Apartment List data showed Midwestern and Northeastern markets have maintained positive rent growth. Nationally, asking rents increased 3.23% on an annual basis in October after months of declines, according to Zillow’s October 2023 Rent Report. This all bodes well for 2024 and beyond, as we predicted last year.
Bottom line, we still believe multifamily real estate is difficult to disrupt—everybody needs a place to live. Our prediction for 2023 remains true for 2024: Multifamily housing will withstand any disruptions that the next year brings, rent growth will re-emerge as demand returns and investors will be able to reap the benefits of steady passive income and increasing valuations.