Economic conditions remain turbulent and will likely stay that way through at least the summer months. The final estimate of first quarter GDP will be released on Wednesday and economists expect it will remain negative. As the second quarter comes to a close, the likelihood of a recession this year increases. Consumption and travel often jump in the summer months, but this year may be different with inflation, gas prices and airline tickets at generational highs. Aside from the traditional economic indicators including CPI, PCE and retail sales, the quarterly earnings reports from oil companies, airlines and major retailers should serve as a proxy for economic activity and sentiment. Industry leaders like Apple, Exxon Mobile and United Airlines are scheduled to report earnings during the last week of July.
In the multifamily sector, economic sentiment is shifting rapidly, as rising borrowing costs have forced the investment market to do a 180. A few months ago, deals were transacted well above the initial whisper price, and it was common for 10 or more offers to be submitted on a given property. In today’s market there are far fewer investors submitting offers and prices have begun to fall. Many deals that are under contract but not yet closed are re-trading, with most seeing a haircut of 5-15% from the initial agreement price. Borrowing costs are driving most of the price reductions, as rates on multifamily loans have doubled in a matter of months. As a result, lenders are requiring price reductions and charging significant fees to cap interest rates.
While the investment side of the industry is grinding to a halt quickly, operating fundamentals are declining slowly or remaining flat. As we forecasted in the first quarter, NER growth is decelerating rapidly. Nationwide NER increased 9.5% year-over-year last week, which on the surface would appear strong, but a month ago, annual NER growth was 13%, at the end of the first quarter, annual rent growth was 17% and at the end of last year annual NER growth was 21.5%. I expect this rapid deceleration to continue as economic conditions deteriorate.
Key Takeaways – Data as of 6/26/2022
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