Chapter 01: Major Asset Classes

Section 03: Multifamily


The price appreciation for multifamily in certain markets reached double-digits in 2021, according to Green Street, (up 26% year-over-year in 2021) and then prices declined steeply in 2022 (down 20% year-over-year in 2022). The rate of decline has slowed down since with only a 1.8% price decline recorded by Green Street in Q1 2023.

CoStar reported that the pace of rent growth for multifamily is projected to taper in the next few years down to low single-digits after record rent growth of about 11% annually in 2021. The descent in annual rent growth was to be expected and, in our opinion, a necessary step in re-establishing a sustainable cycle for this asset class. To put things into perspective, annual rent growth in the five years from 2015 to 2019 was around 3.0% on average.

CoStar stated that rents in Sunbelt markets, which is the region of the United States generally considered stretching across the Southeast to Southwest, had overshot in 2021, reaching as high as 16% annual appreciation. Rents in the Sunbelt markets have since recorded some of the largest pullbacks in growth. Yet, Green Street reported that the overall market rent growth in 2022 was “better-than-expected” in Sunbelt markets while recovery in some West Coast markets was more “sluggish-than-expected.”12

Figure 6: Multifamily Market Fundamentals by Year with Forecast
Source: Multifamily, United States, CoStar Data, as of May 2023.

A spike in new supply is a contributing factor to the deceleration in rent growth for multifamily. Given the overall undersupply relative to projected demand (roughly 462,000 units undersupplied on a cumulative basis since 2002 through January 202313) we are not yet concerned about increasing supply at the macro level, but there is a risk that certain submarkets may overshoot. 

Data from CoStar suggests that more than 1.1 million total units are currently under construction and about 627,000 of those units were started in 2022, the highest rate of new starts in the last 36 years.

Although CoStar shows that multifamily construction pipeline on the national level is still loaded, many of these projects will not be delivered until about 2025. Given the significant decrease in liquidity for construction financing, the pace of new construction has slowed down according to CoStar, with new construction starts down by 48% on an annual basis as of Q1 2023. We expect new construction to trend downward over the next year, changing the outlook for new supply.

We are not yet concerned about increasing supply at the macro level, but there is a risk that certain submarkets may overshoot. 

Despite robust job growth and sizable wage gains, Census data shows that household formation is slowing down due to economic uncertainty and low consumer confidence, which may negatively affect the demand for multifamily in the short-term. 

CBRE reported that overall multifamily investment volume decreased by roughly 19% year-over-year in 2022 but was still the “second largest annual total on record” after 2021. When all is said and done, the demand for multifamily is largely non-discretionary and therefore we expect some level of stability in this sector going forward. Especially considering that the underlying fundamentals remain strong, with occupancy rates reasonably in line with long-term historical trends and positive rent growth. High interest rates also make it more difficult to afford a home, which may push more would-be homebuyers to remain in the rental market and help bolster demand in the multifamily market.


While keeping in mind that multifamily prices have shifted to reflect an outlook of slower growth, we see three viable strategies right now:


First, opportunities to acquire well-located, high quality properties at prices discounted enough to offer going in cap rates (typically 5 to 6%+) that have been simply unobtainable for the previous two years because they were previously compressed. This strategy can span from “Core,” (assets that are often considered one of the more stable types of real estate investment, typically fully leased to high credit tenants, generally have more stabilized returns, and require little to no major renovations) to “Value-add,” (assets that have some level of management or operational problems and require some physical improvements, and/or suffer from capital constraints)—but it is predicated first and foremost on asset quality, market outlook and relative discount to the asset’s peak pricing.


The second strategy is distressed deal flow opportunities. With the rapid rise in interest rates, there have been more off-market opportunities from owners that have un-capped debt on their deals and are seeking relief from their (much higher) reset of debt service requirements. We believe the current market dynamic may produce a handful of distressed trades where sellers are compelled to sell into a highly inefficient market. Such trades will likely fit an opportunistic business plan and have little to no current cash flow, but could be discounted enough to present a favorable entry point.


Finally, ground up development may also be a viable strategy. Such developments tend to be located in markets where entitlements are difficult to obtain, which has translated into lower new supply over the past few years relative to some of the hyper growth markets. With tempered expectations of higher cap rates at exit and lower rates of rent growth between now and stabilization, a window of opportunity has opened to reset business plans to more realistic expectations. A strategy may be to differentiate between developers who were merely seeking to ride the hot hand of sizzling markets back in 2021 to cash in on an unsustainable bonanza, and those developers who are committed to delivering quality projects by going into markets that may still welcome new supply in the years ahead.

12 “U.S. Apartment Outlook,” Green Street, January 2023.
13 “The Linneman Letter, Winter 2022-23,” Linneman Associates, 2023.

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