Economic Quick Takes: Inflation, Valuations & the Multifamily Sector

September 07, 2022

Cushman & Wakefield released research outlining several scenarios for the future of the economy based on several ongoing factors. In the most probable scenario, Cushman & Wakefield predicts a mild recession late in 2022 or early 2023. Sam Tenenbaum, Cushman & Wakefield’s Director of Multifamily Insights, translated what this means for the multifamily sector.

Here are Sam’s key takeaways from the report:

Spreads will normalize: Cap rates track closely to corporate bond yields, with the latter typically less risky and more liquid than real estate. The risk premium for owning multifamily real estate relative to corporate bonds has historically been about 100 bps for multifamily. Today, NCREIF cap rates are 120 bps lower than corporate bonds, meaning cap rates will likely rise to remain attractive by comparison.

Long-run returns remain healthy: Over the past decade, multifamily prices are up 200%, more than any other sector. As prices react to the coming recession in our baseline forecast, owners still have plenty of return yet to be realized.

Hard to keep pace with 2021, but impressive performance: Multifamily is coming off the strongest year for investment activity, price growth, rent growth, and occupancy in 2021. Some of these metrics, notably sales volume, have surprised to the upside, but most have pulled back from last year’s blistering pace. That said, fundamentals remain stronger than they were pre-pandemic, and will remain strong through Cushman & Wakefield’s baseline forecast.

Attractive regardless of scenario: As we considered investment ideas for the coming few years, multifamily is the only property type that represents an attractive investment across all scenarios presented in the report. Multifamily is sensitive to interest rates given its strong pricing, but the U.S. is still underbuilding homes relative to population growth. Many years of strong fundamentals still lie ahead, with rental accommodation particularly attractive for defensive reasons.