June 19, 2023

The Dynamic Impact of Interest Rates on Multifamily Development in 2023’s Real Estate Market

OnsiteIQ

In 2023, the multifamily development sector within the real estate development landscape is witnessing significant transformations. Influenced by fluctuations in interest rates, the dynamics of multifamily development are undergoing a considerable reshuffle. Elevated mortgage rates and a national housing shortage are influencing many renters to defer their homeownership dreams, leading to a notable shift in the multifamily rental market [1].

Throughout much of 2022, multifamily development enjoyed robust rental demand. However, this demand saw a significant drop in the last quarter of the year. RealPage data reveals that multifamily demand, which had reached an estimated 661,910 units by the end of 2021, turned negative by the end of 2022, standing at -103,485 units. Despite the anticipation of negative demand in early 2023, multifamily development is projected to witness a positive demand, reaching 492,862 units by year-end [1].

The national multifamily vacancy rate, sitting at an estimated 5.5% at the close of 2022, is projected to rise to 6.0% by the end of 2023. This increase is largely attributed to the influx of new supply in the multifamily development market, expected to deliver over the next 12 to 18 months. Combined with the looming economic recession and the prospect of negative job growth, these factors are set to keep renters in the market for a longer duration [1].

The multifamily development sector is also set to see a shift in rent growth. After starting the year on a negative note, rent growth is forecasted to turn slightly positive, reaching 1.5% by year-end. This contrasts the positive rent growth witnessed in 2022, which reached an estimated 4.75%, marking a decrease from an estimated 10% in 2021 [1].

Effective rent growth for stabilized class A and B units in the multifamily development market was 8.5% and 9.0%, respectively, by the end of 2022. However, both classes had seen double-digit annual growth in the previous quarters. Remarkably, Class C ended the year with the highest effective rent growth at 12.4% [1].

As we delve deeper into 2023, the multifamily development sector is expected to see an upswing in properties offering concessions. As of Q4 2022, about 12.9% of class A and 9.5% of class C properties were offering concessions. This trend is set to rise in 2023, further shaping the multifamily real estate development landscape [1].

Given the current real estate development climate, renters are advised to consider extending their affordable leases or moving to suburbs, where rent growth has been slower compared to urban rentals. Sharing a larger unit is another viable option, as studio apartments have witnessed more significant price growth compared to one- or two-bedroom apartments [2].

The multifamily real estate development market is navigating through turbulent times with the rise in interest rates. However, this volatility unveils a host of challenges and opportunities for developers and investors alike. As we continue to traverse through 2023, gaining a comprehensive understanding of the intricate interplay between interest rates and multifamily development dynamics will be crucial.