Rent and Operating Trends – Week of July 23rd 2023

Economists will be focused this week on monetary policy as well as the first release of Q2 GDP. The Fed will meet on Tuesday and Wednesday, and while most forecasters anticipate another 25-basis point increase in interest rates, expectations are mixed on whether or not the Federal Open Markets Committee will raise interest rates again after this week. The Committee raised the Fed Funds rate from 0% to 5.25% in just 14 months, but then paused their monetary tightening at their last meeting. Many key inflation indicators such as the Consumer Price Index and the Personal Consumption Expenditures Index have retreated meaningfully in recent weeks. The Employment-Cost Index will be released Friday and represents the most comprehensive measure of wage growth. Recent strength in the labor market is leading some economists to forecast higher wage growth, thus pushing the Fed to keep interest rates higher for longer.

Many have predicted that the monetary tightening would lead to a recession, however we have not seen GDP decline since Q2 of last year. Economic growth has slowed but remained positive in Q1. The first estimate of Q2 GDP will be released Thursday, which should give us a strong indication of whether the economy is falling into recession. Given the strength and resiliency of the labor market and the slowdown in inflation, I would doubt we will see a technical recession until early next year at the earliest.

While a recession in the macro economy may not be likely for several months, the slowdown in the multifamily industry has already begun. After a weaker than expected spring rental season, apartment owners and operators should prepare for a difficult fall and winter. Demand continues to wane not only from 2021 highs, but occupancy, traffic, and leasing activity has fallen below pre-pandemic averages. New supply is being delivered in droves, which is only adding to the stress in property performance.