After a rocky and tumultuous 2023, real estate investors are hoping for a prosperous year in 2024. But “hope” isn’t a strategy, so it would be hard to blame investors for seeking an edge to recognize trends that can help them thrive this year. One of the ways we look to stay sharp is by reading industry reports, outlooks, and forecasts to determine multifamily projections for the upcoming year.
Many brokerage firms, economic entities, and government agencies produce their own reports that are filled with excellent information on the economy, market, and industry. Most of the time, multifamily projections are consistent across multiple reports. Sometimes, however, there are distinct differences of opinion.
My approach has always been to gather as much information as possible and then decide what to pay attention to and what to ignore. After reviewing many key reports, here are a few takeaways and implications worth considering.
The biggest multifamily headline for 2023 was the historic rise in interest rates. Between 2022 and 2023, the Fed raised interest rates 11 times in an effort to fight inflation. The unprecedented velocity of increases saw the Fed Fund Rate range increase from 0.25%–0.50% to 5.25%–5.50%. The Fed decided to hold off on an increase at the end of 2023, sparking many to believe that rates will start to come down in 2024.
There is no guarantee rates will drop, but a rate drop would be a relief for many investors. Even if rates do drop, it may come too late for several investors. There is an alarming amount of loans coming due, and rates likely won’t come down quickly enough for these projects.
According to a recent report by Trepp, it is estimated that $352 billion in multifamily loans will mature by 2027, with around $60 billion maturing by the end of 2024. With lenders tightening up on loan requirements, many of these mortgages may not qualify for refinancing. This will create problems and opportunities for investors.
Multifamily projections from many publications are predicting modest rent growth and an increase in vacancy rates for multifamily this year. Freddie Mac Multifamily is projecting rent growth of 2.5% nationally and occupancy of 94.3%. Cushman and Wakefield calculates vacancy differently and projects the occupancy to fall from 92.2% to 91% in 2024.
It’s worth noting that the sector is coming off of record levels of occupancy and double-digit rent growth, so this reset was expected by many. The consensus is that the fundamentals for multifamily remain strong and rent growth should pick back up in 2025 or 2026.
One of the biggest drivers of slowed rent growth and lower occupancy is a surplus of supply coming online. In 2023, there were 440,000 new apartment units delivered, according to a report by RealPage. This marks the highest number of completions in 36 years. Currently, there are over 1.2 million units under construction. RealPage estimates that over 670,000 units will be delivered in 2024, while Yardi Matrix projects deliveries of 510,000 units. Either way, 2024 is likely to set a new high for deliveries and this will have a big impact on absorption and rent growth.
New deliveries are concentrated in the Sun Belt and Western markets. According to a report from Cushman and Wakefield, 25% of new multifamily units are concentrated in just five markets. As is the case with all real estate, the supply impact will play out on the local level. In 2023, Raleigh-Durham, Tampa-St. Pete, and North Dallas each saw developments increase by over 40%. Compare that to Salt Lake City, Seattle, and Austin, where new construction declined by around 40% each.
2023 proved to be a strong year for employment, adding 2.7 million jobs. While the number of jobs was less than the previous two years, it’s the fifth best year since 2000. In addition, the unemployment rate remains low at just 3.7%. The employment market appears relatively strong.
Conversely, wage growth and a shortage of skilled labor concern economists. Wage growth is projected to dip to around 4% in 2024, following a high of 5.9% in March 2022. Wage growth is expected to pick back up over the next couple of years.
The shortage of skilled labor can be attributed to different factors including early retirement during the pandemic for those 55 and over. To attract more candidates, employers are starting to ease requirements on degrees and offer training for skilled positions.
The consensus is that job availability is strong and those who want a job can find one, though the pay may not be as strong as in recent years. Ultimately, many expect employment concerns to be temporary challenges in 2024, with a solid labor market in the coming years.
There are a lot of predictions for multifamily in 2024. Regardless of what happens with interest rates, rent growth, occupancy, and jobs, there will be opportunities for multifamily investors. Local market dynamics will be critical as some markets will face a supply surplus, while others will see growth that outpaces the national average.
These multifamily projections and reports are worth reviewing to understand the dynamics and factors that impact the economy and multifamily investing. However, relying too heavily on these reports could be detrimental. While researchers and analysts spend countless hours gathering data and insights for these reports, none of them have a crystal ball. Instead of trying to time the market based on predictions for 2024, the most successful investors are focused on investing with an outlook for the long haul.
About the Author:
John Casmon has helped families invest passively in over $100 million worth of apartments. He is also the host of the #1 rated multifamily podcast, Multifamily Insights. Prior to multifamily, John was a marketing executive overseeing campaigns for Buick, Nike, Coors Light, and Mtn Dew: casmoncapital.com
Disclaimer:
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.