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Predicting an Unpredictable Year

Sam Tenenbaum • 1/11/2023

Nearly everyone is feeling a bit of whiplash from 2022. We’ve seen the biggest increase in interest rates since the 1980s, far more than anyone predicted and at a far faster pace than anyone expected. And yet transaction volumes for multifamily properties are likely to be second only to 2021, which was a phenomenal year for real estate. It’s been difficult to predict what will happen all year and into the next couple of years. But context is everything, so it’s important to see where things stand now and to compare 2022 data to recent years to fully understand the market.

At the end of November*, word from the Federal Reserve seems to be that we’re moving into the next phase of rate increases, which will likely be smaller. Hopefully, the days of 75 basis point (bps) increases are in the rearview mirror. It’s worth remembering that before we saw increases of 75 bps this year, the last time it had happened was nearly 30 years ago. 

Still, there’s a low probability of that magical hoped-for soft landing happening. A more likely outcome is a mild recession, hopefully with as little labor market scarring as possible – just enough to bring down inflation to under 3%.

The Fed has exclusively focused on one half of its dual mandate: price stability. They’ve picked the worst evil to fight now, but as inflation eases – and it’s already happening to a certain extent – there will be pressure on the Fed to focus on the other mandate, full employment. At some point, likely in early 2023, the Fed will likely pause hiking rates, hopefully before significant job losses take hold. 


Multifamily Resilience to Recessions

In the anticipated mild recession ahead, it’s unlikely that apartment fundamentals will deteriorate in a meaningful way. The underlying multifamily market continues to be healthy compared to recent history; vacancies are well below previous recessionary levels, and rent growth, while pulling back from all-time highs, remains strong by historical measures. 

Even during the Great Financial Crisis (GFC) apartments experienced a minimal vacancy rate increase of just 75 bps compared to as much as 275 bps in other sectors. Similarly, cumulative rent losses were de minimis; 3.75% for apartments, compared to as much as 13% for other sectors. 


The concern around the multifamily market comes from the demand side. Leasing traffic appears down across the country on the heels of record-setting demand. In 2021, more than 700,000 units were absorbed across the country, double any previous year in modern history. Some of that demand was pulled forward into 2021, which explains the weaker demand seen in 2022. Across the Cushman & Wakefield Multifamily Asset Services portfolio, applications per available unit have remained healthy, implying demand for future multifamily demand remains robust. 

As for lease trade-outs, the industry has seen new lease trade-outs pull back in the wake of economic uncertainty, which is the case among the Cushman & Wakefield Multifamily Asset Services portfolio as well. New lease trade-outs still averaged about double the pre-pandemic norm. Renewal trade-outs continue to outperform, which will likely remain the case as renters are brought closer to market rents as leases turn over. 

On the supply side, there are more units now under construction (926,000) according to the Census Bureau and HUD than at any time in history. On a per capita basis, we’re still well below construction in the 1970s, but some markets are facing unprecedented levels of new construction. Performance will become much more nuanced at a market and submarket level in 2023 than it’s been in most of the past decade. 


Transactions and Valuations Finally Show Movement

Context is important when you review market conditions and look into the future, particularly after a year like 2021 when transaction volume, demand, and valuations broke records. While the headwinds of higher interest rates, inflation, and slower growth have impacted the multifamily property sector like every part of the economy, apartments have continued to be a favored asset class. 
While the third quarter of 2022 saw fewer transactions than the third quarter of 2021 – and the fourth quarter of 2022 is already showing a similar decline** – it’s important to understand that a year like 2021 is hard to match. Just looking at the fourth quarter of 2021, $156 billion in multifamily real estate changed hands, an incredible increase compared to the next highest quarter for transaction volume of $64 billion in the fourth quarter of 2020. In other words, it was always unlikely that we would see another record-shattering year this year. 

In 2022, transaction volume for all real estate asset classes reached $243 billion through October, which is the highest January-October figure ever. Forty-five percent of all commercial real estate sales in the past year have been multifamily buildings, which normally represent about 33% of sales. That means close to $1 out of every $2 is used to buy an apartment. Why? Apartments are considered a stable asset class with good fundamentals, which remains appealing in a time of uncertainty. So even as transaction activity slows, multifamily will likely remain the preferred asset class. 

In a sense, multifamily has been a victim of its own success. Apartment prices are up 200% over the past decade. In 2021, prices rose drastically, and the Federal funds rate was zero. Things look a lot different now compared to what they did at the beginning of 2022. Interest rates have increased at the fastest rate in 40 years, and if they held firm today, it would be the third-largest hiking cycle since WW2. That extreme movement inevitably has an impact on valuations.*** 

Typically, real estate pricing follows a similar path to Baa bond yields. Bonds are more liquid than real estate, but the relative risk profile of those assets is comparable. In 2022, we’ve seen something unusual: the spread inversion between the two investment classes is the most extreme it’s been since the GFC. Private market pricing hasn’t adjusted as quickly as bond prices to the new interest rate environment, meaning investor are more incentivized to purchase corporate bonds rather than multifamily real estate until pricing adjusts.


Markets with Investor Opportunities 

During a recession, even a mild one such as the one predicted for 2023, we typically see a flight to safety among investors. Historically that’s led to investors to retreat to gateway markets such as New York, Boston, and Los Angeles. The COVID rebound in these markets is still ongoing, and the embedded supply constraints will likely prove beneficial in the months to come. 

California’s severe housing shortage presents an interesting opportunity because even though the state has taken steps to alleviate the shortage, construction hasn’t come to market. All markets in California with the exception of San Francisco have vacancy rates below the national average (with Southern California boasting an average of roughly half the national figure), and every market is less exposed to supply-side pressures than the national average. 

One additional reason to be bullish on the outlook for the multifamily sector is that household formation continues to rise while homeownership is currently out of reach for many. Home prices would need to fall by 25% to regain the average spread between mortgage rates and apartment rents, which would be a greater drop in prices than was seen during the GFC. Another way of visualizing this trend is through data gathered by Cushman & Wakefield Multifamily Asset Services. The number of residents who vacated an apartment to buy a house has declined by more than 7% since May 2022 because of the increase in mortgage rates along with high prices. 


While it’s difficult to forecast in a time of uncertainty, we’re optimistic that with a slowdown in rate hikes from the Fed or even if the Fed holds rates higher for a little while, by the second half of 2023 multifamily real estate markets could show improvement, potentially spurring buyers and sellers to transact.


This article was written in partnership with Greystone.

*: In December’s meeting, the Fed confirmed a 50 bps increase to benchmark interest rates, signaling movement into the next phase of the rate hike cycle. 
**: Q3 volume was 19% lighter than Q2 and Q4 volume was 34% lighter than Q3 according to RCA. These data points will likely be revised up as more data is collected. 
***: Until Q4, private measures of apartment pricing showed no cap rate movement. In Q4, RCA’s data shows a 30 basis point increase in median cap rates for multifamily properties.

author / contact


sam tenenbaum
Sam Tenenbaum is Cushman & Wakefield’s Head of Multifamily Insights. In this series, he shares unique perspectives on today’s multifamily market, gathered from Cushman & Wakefield’s unique data on the lending environment, strong capital markets presence and the 175,000 units that we manage across the U.S. 

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