The Fed raised interest rates once again last week, bringing the benchmark short-term rate to a range of 5.25-5.50%. The change has had a very mild impact on capital markets, as major equity indices, commodity markets and long-term interest rates increased modestly. Yet each incremental increase will have a significant impact on multifamily valuations in the coming months. As loans that originated in late 2020 and early 2021 come due in the next few months, we are likely to see a significant increase in cap rates and a drop in valuations as the cost of borrowing has skyrocketed. The hit to valuations will only be exacerbated in several markets, as operating fundamentals have declined, leaving properties with lower net operating income than previously forecast. I do not expect the Fed to lower rates in the near future, which means many property owners will need to re-evaluate return expectations as a wave of loan maturities and transactions takes over the market in the next 18 months.
Multifamily operating metrics were mostly flat or negative last week. As the calendar moves to August, the prime rental season in most markets has concluded and I expect most fundamentals to plateau and then fall over the next five months. Supply will be a key factor, but so too will job growth and wage growth. The employment market remains strong, with new jobs being formed and wages rising, however the trend in job growth has been decelerating. Demand for housing remains strong in the sunbelt, yet new supply is overpowering the demand. While our industry has grown significantly since 2020 on an aggregate basis, the next two years will likely be weak from a fundamental growth perspective.
Key Takeaways – Data as of 07/30/2023
Traffic and Leases:
Traffic dipped modestly at the national level, and the average property is receiving 8.5 tours per week.
Only six of the 33 markets tracked by Radix Research posted traffic gains last week, and none saw growth of more than 0.2 tours per property. On the contrary, most markets experienced declining traffic, and traffic in metros including Tampa, Raleigh and San Jose dropped by around 0.5 tours per property.
Leasing activity was flat nationwide, and in many metros as well. A handful of markets experienced modest increases or decreases in the number of leases signed per property.
Occupancy and ATR:
Nationwide occupancy continues its steady decline, with the average occupancy rate falling another two basis points last week. The national occupancy rate is now 94.2%.
Southwestern and Western markets led the limited occupancy growth last week. Tucson, San Jose, Phoenix, Colorado Springs, and San Francisco all posted modest occupancy increases.
San Antonio and Jacksonville had the weakest occupancy performance of all markets last week.
ATR was mostly unchanged last week, and the average property nationwide has 15 units available to rent over the next 60 days.
Net Effective Rent:
NER was flat at the national level last week.
At the market level rent growth was mixed, with roughly half the markets posting growth, while the other half registered rent declines.
San Francisco and Salt Lake City led all markets in declining rent, as NER fell 80 basis points and 50 basis points respectively last week. These markets continue to struggle, and rents are down more than 3.5% on an annual basis in both metros.
More affordable markets continue to perform well. Tucson, Chicago and Albuquerque lead the nation in annual rent growth, and while Chicago may not seem like an affordable market, certainly compared to Tucson and Albuquerque, the Windy City is the most affordable of the six Gateway markets.
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