Multifamily housing developments, or any property that houses multiple residential units within a single building or complex, have recently undergone a few surprising shifts and surges as an asset class. Earlier in 2023, less-than-ideal economic conditions seemed poised to complicate strong fundamentals, creating an unclear outlook heading into the next year. However, a rise in household formation has continued to drive multifamily demand, resulting in more movement in terms of mergers and acquisitions.
Keeping an eye on the changes in the multifamily market can help you make informed, strategic decisions about your portfolio. Rising household formation, or new people leaving family homes to live on their own, and strong demand are good signs for an already low-risk asset class, but it's still critical to conduct thorough market research. By understanding the factors contributing to the mutlifamily demand trends, you can ensure your multifamily projects remain profitable long term.
Here’s everything you need to know about the ongoing shifts impacting this asset class, and how you can prepare your development team for success:
The Unprecedented Surge in Multifamily Demand
In the second quarter of 2023, household formation in the United States reached its highest point since the COVID-19 pandemic began, fueling an unprecedented surge in multifamily demand. New households rose by 1.2 million, bringing the yearly total to 2.1 million. Market conditions - such as the end of the student loan repayment pause - could put a damper on household formation growth and homeownership rates. Still, the strong trend is an overall positive sign for the multifamily space, suggesting accelerating demand in the year ahead.
Surging demand is good news for multifamily developers and has thus far resulted in the biggest year for new multifamily housing production in over three decades. Census data showed the number of households in the United States increased to 131.2 million in November of 2022, up from 128.4 million in 2020. Multifamily developers have risen to meet this need, and overall U.S. multifamily development has reached unprecedented levels. 529,000 units were started as part of multifamily development nationwide in 2022, the highest number of new construction in 36 years.
Household formation was on the rise before the COVID-19 pandemic, with the number of households headed by 25-34-year-olds up by 300,000 from 2016 to 2020. Q2 in 2023 was also the first time in three quarters the market showed positive effective rent growth year-over-year. Renters are also shifting market demand, with high costs of living and remote work driving those aged between 25 - 34 away from significant job hub cities like San Francisco and New York and into markets like Austin, Charlotte, and Raleigh-Durham.
What the Rise of New Households Means for Multifamily Developers
Multifamily developers should plan to conduct thorough market research and due diligence before pursuing a major project. By understanding the factors pushing people toward multifamily rentals, you can have a better understanding of how your project will perform in the current market. The current rise in household formation and the current rise in multifamily demand is largely being driven by the following factors:
Escalating homeownership costs. First-time buyers are increasingly finding homes out of reach as costs soar due to rising interest rates and housing shortages. Many of these would-be buyers will be looking for multifamily apartments that suit their needs, such as mixed-use developments with plenty of amenities or other luxury buildings.
Rising interest rates. High-interest rates are putting homeownership out of reach for many would-be buyers. The current average interest rate for a 30-year fixed mortgage is 7.12%, more than double its 3.22% level in early 2022. Home mortgage rates fell to a 5-year low in 2023 as a result, and many of these would-be buyers will continue to rent on the multifamily market until rates come down.
External economic challenges. New households forming among 25 - 34-year-olds are more likely to be burdened by debt, as people in this demographic are statistically likely to have student loan or credit card debt. External economic factors are also increasing barriers to homeownership and will increase demand for multifamily rentals, especially affordable units in key markets.
Multifamily Housing Development Investments & Challenges
Positive household formation trends may not have an immediate impact on access to capital for your business. Banks have continued to cut lending to multifamily developers, with a 33.4% drop in permitting year-over-year in 2023. Investors are looking at a downward trend in multifamily pricing and general uncertainty in commercial lending, posing challenges to obtaining credit. Macroeconomic conditions will continue to impact the availability of capital, even as housing shortages, rising household formation, and strong market demand keep multifamily investment risk low.
Economists are predicting the slump will rebound and the market will pick back up around the middle of 2024. As a result, you may be able to close multifamily real estate development deals more easily in late 2023 and early 2024 than in the first half of the year. The good news is that the recent rise of household formation and strong demand could get deals moving more quickly, especially for teams with a strong portfolio and positive reputation.
Resurgence of Multifamily M&A in 2023
Multifamily mergers and acquisitions (M&A) had a resurgence in 2023 after a slow start to 2023. Executives and analysts at the Blueprint Conference in Las Vegas reported that interest in dealmaking for multifamily companies had picked up considerably, which is good news for a soft real estate market that has been off by 65% to 70% year-over-year.
Investors are cautiously optimistic that the interest-rate hikes implemented by the Fed to quell inflation will “soft-land” the economy, and lending will likely increase once market conditions become clear, Private equity in particular has capital ready to lend, but firms are being pickier about which companies to work with, looking for teams with proven track record and modern approach.
Future Projections Multifamily Developers Should Note
Multifamily Housing Developers should prepare for a few multifamily development trends in 2024. Market dislocation, tight financing terms, and an influx of new supply in key markets are still expected to cause turbulence for what has historically been a low-risk asset class. Even so, housing shortages, household formations, and the drop in annual home sales, should continue to keep risk low. Certain types of multifamily housing, such as small, affordable units or luxury apartments, will remain in high demand. Even amid the positive trends in household formation and increase in M&A in the final quarters of 2023, you should weigh multifamily investment decisions carefully heading into the next year.
Investors are increasingly looking to work with firms with an efficient, modern, and proactive approach to the development process. Leveraging real estate development software like Northspyre can streamline the development process on multifamily projects, lowering costs and maximizing returns from pre-planning to stabilization. The platform acts as your system of record, allowing your team to leverage data from over $125 billion of successful development projects to predict what your project should cost based on location, asset class, and other relevant factors.
Book a demo and start optimizing your multifamily development projects to ensure reliable outcomes with high returns.
Tag(s):
Real Estate Technology