Multifamily Highlights, 10/8/2022: Testing Multifamily’s Stability During Economic Uncertainty

Even as apartment demand continues to normalize and ever-increasing interest rates create more challenges for investors, reports published this week emphasize the performance and stability of private commercial real estate investments like multifamily apartments, which have historically been valued as less volatile and better-performing alternatives to the stock market during periods of economic uncertainty.

RealPage: “U.S. Apartment Demand Plunges in 3rd Quarter as New Leasing Stalls More than Expected” –

  • I thought we could start with this article first because it runs parallel to the sentiment of a lot of investors, and more than another week of interest rate and inflation speculations, it’s important to address the state of the multifamily market, the implications of our current environment (what might happen next), and what are the most prudent decisions that investors can make.
  • Apartment demand went way down in the 3rd quarter of this year, -82,095 units, knocking down occupancy by a full 1% in what’s usually a high-demand quarter during peak leasing season. According to RealPage, it’s the first time in RealPage’s 30-year history of tracking the apartment market that demand was negative in the 3rd quarter.
    • I have a couple of comments intended to soften this fact, but this trend cannot and should not be disregarded.
    • Firstly, demand is down, but rents have not dipped down to a commensurate degree. 
      • Looking at the timing of demand and rent growth changes, there’s a lot less lag than I expected between a change in occupancy and a change in rent growth.
      • For example, you see very high demand in Q3 of last year, and those months saw the highest rent growth. In Q4 the demand was lower, and then the rent growth was lower. 
      • I was expecting to see high demand in one quarter, then the following months would see lower rents, but it seems more concurrent than I expected
      • Which is all to say: The negative demand that RealPage has recorded may not be a sign of bad things to come as much as a record of things that are already happening or have happened.
    • Secondly, as you can see in the line graph in the RealPage article, the current plunge in apartment demand from Feb-Aug of 2022 is almost a mirror image of the hyperactive climb in apartment demand from Feb-Aug of 2021, and it leaves us at 4.4% vacancy, such that, in absolute terms, and this is a direct quote from the RealPage article, “the U.S. apartment market remains on firm footing.”
  • Having made my “couple” of points to pull this subject out of the darkness and into the sunshine, it is worth dwelling on the worst-case scenarios and the potential risks that could follow.
  • Leave it to Jay Parsons to actually spend some time thinking about what may and what may not be behind the downward trend in apartment demand:
    • First, he reminds us all that he correctly predicted that rising interest rates wouldn’t meaningfully drive up apartment demand, and he’s also not convinced that we’re seeing less demand because rents are outpacing wages.
    • So, he says,
    • “If it’s not affordability, what is it?
    • Soft leasing numbers coupled with weak home sales point to low consumer confidence. Inflation and economic uncertainty are having a freezing effect on major housing decisions. When people are uncertain, human nature is to go into ‘wait and see’ mode. Net new housing demand is dependent on household formation – which drove the 2021 housing surge but appears to have frozen earlier this year.”
    • We’ve got a pervasive “wait and see” attitude that is keeping household formation low. Jay Parsons has elsewhere noted the lower leasing traffic, and that’s something that surely is connected to lower demand. Even if retention rates are high with people staying put, it appears that the active movement of renters from one home to another is a mechanical driver of apartment demand.

Marcus & Millichap: “Commercial Real Estate vs S&P 500” –

  • John Chang sees the recent stock market dip, as well as its prolonged slide since the beginning of this year, and is glad that he is a real estate investor
  • We’ve all but wiped out all of the stock market gains made last year. 27% growth last year, 24% wiped away so far this year. Not great.
  • You look at a chart like the one at 2:00 into the video, and you can really see the volatility of the stock market (as measured by the S&P 500).
    • The S&P 500 was up by 26.9% in 2021, and now it’s down 24%
    • In contrast to the S&P 500, no commercial real estate sector has negative average price growth this year, even though they didn’t see as much price growth last year. 
      • Apartment price growth was only at 8.1% in 2021 compared to the 26.9% of the S&P 500, and this year it’s up by 10.3% while the S&P is down 24%. 
      • Net for these two years, you’ve got stocks up by a little under 3%, and apartments are up by 18.4%.
  • This is real estate price growth, not rent growth, so instead of being based on the demand from potential tenants that drives rent growth, price growth also factors in the demand from investors.
    • To return to my initial impression of the information Marcus & Millichap lays out here for us, the comparative price growth in commercial real estate assets reflects a greater demand by investors, and if you’re thinking about rising prices in terms of lower cap rates, well, a lower cap rate is a pretty good indicator of lower risk.
    • S&P 500 prices show more volatility. Investors turn to commercial real estate for stability and perceived lower risk. Prices for commercial real estate go up and cap rates go down in response to greater demand by investors.
  • An important caveat here that John Chang notes is that the commercial real estate prices recorded here are likely lagging by 90 days, give or take, because the agreed upon price is usually established 3 months before the deal actually closes.
  • Alongside its slow-moving nature, commercial real estate tends to move less dramatically than the stock market, and when it comes to total returns, commercial real estate returns have outpaced stock market returns over the last 22 years.


  • This report and resource comes from Florida Atlantic University, specifically, the Florida Atlantic University Real Estate Initiative, which is a regular source of great research and information about the housing market.
  • The Waller, Weeks, and Johnson Rental Index measures how much rental housing has outpaced historical norms, and they have figures for the whole country as well as individual markets.
  • Nationally, rental housing is growing 9.84% faster than normal. The 12.27% year-over-year and 0.64%  month-over-month rent growth is taken from Zillow’s “Observed Rent Index,” but it’s nice to see it here just as a little yardstick, so to speak.
  • Top on the over-priced list? Miami Florida. Number two on the overpriced list? Cape Coral, Florida. Number three on the overpriced list? Tampa, Florida. Numbers 8-11 and 13 on the list? North Port, Orlando, Deltona, Palm Bay, and Lakeland, all Florida.
  • FAU also has a similar list of markets where single family home price growth is outpacing historical trends, and the markets do not line up perfectly with rental markets.
  • This isn’t new but bears repeating, for the vast majority, single family home prices have increased far, far more than rental prices.
  • But again, it’s not always perfectly correlated: You’ve got Boise, Idaho on the top of the list for single family home price growth, outpacing historical trends by 66.73%, but when it comes to rentals, Boise is still outpacing norms, but now it’s at 8.81% instead of 66.73%.
  • Even the market at the bottom of this rent growth list, Minneapolis, still has rent growth outpacing historical averages by 1.82%. Some of these markets near the bottom, like San Francisco and San Jose, have seen some increased growth recently, so there is that possibility that future rent growth could flow into these markets that have not seen the leaps-and-bounds increases in rents over the past two years.

Fortune: “Wall Street: U.S. housing market to see the second-biggest home price decline since the Great Depression”

  • Link to PDF in case article is under paywall
  • “To see” is the key word in this headline. Hasn’t happened yet. We have yet “to see” it, but this article from Fortune is going to tell us what to expect.
  • Let’s also come into this with a clear head and admit that this headline is trying to get people’s attention by saying that this is the second-biggest decline since the Great Depression.
    • The biggest decline in home prices since the Great Depression was during the housing crisis and Great Recession, when home prices fell by 27%. The projections in this article are less than a third of that 27%
  • So, what’s going to happen to the housing market?
    • Morgan Stanley says home prices will fall 7% by the end of 2023
      • The massive, steep home price increases of the past two years is the key context here.
      • As Fortune notes, a 7% dip would bring us back to where prices were in January of this year. In January 2022, home prices were 32% higher than they were in March 2020.
        • That’s an average of 16%+ increases in home values for two straight years
        • None of the predictions of sinking home prices come close to how much home prices have risen during that period from March 2020 to January 2022.
          • Now, to dig into this a little more, average home price growth, historically, is around 4%.
          • So, let’s lop off the 4% expected from those two 16% years, and you’ve got 24% of home price growth in excess of the norm.
          • You could double most of the worst-case scenarios in this article, and that still would not completely erase the price growth between March 2020 and January 2022.
    • The second projection is from Goldman Sachs, which says home prices could fall by 5-10%
      • Last month’s prediction was for 1.8% home price increase in 2023, but now, their model is accounting for “evidence of strong mean reversion [seen] in regional data.”
      • Do you think it might be true that, in the same way that nature abhors a vacuum, economic forecasters relish a mean reversion?
    • Moody’s Analytics, like Goldman Sachs, also predicts that home prices will be down by 5-10%
      • At least the outlook from Moody’s is prefaced by the fact that robust housing demand and a more sensible lending environment preclude the possibility of “2008-style housing crash.”
      • Moody’s also notes that this housing downturn will vary significantly from region to region, with some markets that it sees as significantly overvalued possibly seeing 10-15% lower home prices or even 20-25% lower prices if a deep recession were to take root.
      • I am a little less convinced by Moody’s projection because it has such a wide range, and while it is very true that different regions will be affected differently by a potential housing downturn, I am more persuaded by FAU’s research when it comes to picking which markets are overvalued and by how much.
    • Fitch Rating: down by 10-15%
      • This prediction by Fitch Ratings is linked to their projections of “US GDP growth, unemployment, consumer confidence and home affordability”
      • They see GDP growth for 2023 and 2024 at 1.5 and 1.3%, respectively, and unemployment going from 3.6% in 2022 to 3.7% in 2023 and 4.1% in 2024. 
  • So, where does this leave apartment investors, and are the factors driving these projections of home price declines going to have an equal effect on apartment demand?

Nuveen: “How to Know if a Building Will Deliver as an Inflation Hedge” –

  • Sure, we’ve said that commercial real estate is a great hedge against inflation, but what do investors need to know to ensure that the property they invest in will actually deliver on these promised inflation hedge qualities?
    • Nuveen still sees some upside in “strategic market segments,” and “[s]hort-term returns will likely be driven by noncyclical properties less affected by downturns: medical offices, data centers or self-storage. Active portfolio management will be key to driving performance in a slow growth economy.”
    • Ok, so I came upon this report by way of a GlobeSt article that implied that Nuveen is saying that Sun Belt properties are also an option, but here’s the actual quote, because it may support an alternative interpretation:
      • “The key to the inflation hedge is understanding the demand dynamics and vacancy rates of individual markets. Consider medical office properties in high growth cities and suburbs. Or housing properties in the U.S. Sun Belt. Real estate can keep pace with inflation assuming it is the right building, in the right location with sufficient demand to support higher rents.”
      • So, when they say that we should “consider” something here, does that mean “consider” as in “think about” or “consider” as in “consider investing in” ? It may not be the best advice to consider investing in the Sun Belt, but it is worth considering the risks.
  • The points that they make in this report are valid, but some of their examples don’t line up so well with what I’ve read about in the market. Yeah, it’s important to find the right building in the right location with sufficient demand, but isn’t that true for every investment, not just when you’re looking for a hedge against inflation?
  • The thought about now being the time for active portfolio management is a little more bold of a statement, but I could see that being a double-edged sword. One of the benefits of commercial real estate during an inflationary period is that there is this lag in price discovery compared to the stock market, which also, I would argue, contributes to less extreme volatility or price swings in the commercial real estate market. To take a more active role in portfolio management, is this one of those situations where you’re in a traffic jam, you switch lanes, and the lane you switched in is slower? And do both lanes end up being slower if everyone is switching lanes all the time?
  • Their point about noncyclical commercial real estate assets could, 
  • They close with a solid point about commercial real estate assets in general that hooks back into the Marcus & Millichap video we covered earlier:
    • “Historical data going back to the 1970s show that real estate tends to perform relatively well in rising rate environments in absolute terms, but even more so relative to interest-rate sensitive assets. Since 1977, U.S. core real estate (as measured by NCREIF ODCE) has averaged annualized returns of 12.6% during rate hike cycles and 10.2% in the year following.Even in this rising rate environment, we believe private real estate offers opportunity. Public REITs behave very differently compared to private real estate because values may be influenced more by equity market sentiment. Public REITs have significantly higher volatility and offer shallower markets, as not all property types are represented in REITs in all markets.”
    • It’s true that not all commercial real estate investments are created equal, and if you’re looking for a less volatile investment like a lot of investors are right now, then a private real estate is likely a better choice than a public REIT.

NAR: “October 2022 Commercial Real Estate Market Insights” –

  • A very welcome surprise, and I had to add this report at the last minute. NAR used to publish a monthly account of different commercial real estate markets, and this one comes after several months during which I thought that NAR had stopped making these reports publicly available. If they’re switching to publishing these every quarter, maybe re-title the report from “October Commercial Market Insights” to something like “Q3 Commercial Market Insights” ? Well, just in case NAR changes their mind about this one, I downloaded the PDF.
  • Skipping ahead to the multifamily section, you know, this is a multi-sector report, but it’s nice to see multifamily returns still showing strength, and Indianapolis is among the top areas for rent growth year-over-year. It’s a little like the economic volatility we saw early in the pandemic, with stable midwestern markets showing their strength.

Leave a Comment