Is the Multifamily Sector Recession-Proof?

February 08, 2023

“I’m a glass half empty kind of person, but I still think the recession will be milder than most people think,” said Rich Martinez, head of production, agency lending for Greystone.

After the rollercoaster ride of the past few years, a dip into a mild recession in 2023 should be much easier to manage than the plunge experienced in the spring of 2020.

“I’m a glass half empty kind of person, but I still think the recession will be milder than most people think,” said Rich Martinez, head of agency lending production for Greystone. “The impact won’t be anything like the Great Recession or the pandemic recession.”

Martinez anticipates that the upcoming recession will be more like a correction, with the pendulum swinging back to normal instead of the unsustainable explosion of the multifamily sector over the past couple of years. While the fear of a recession may be causing some hesitancy among investors, volatile interest rates are having a bigger impact, he said.

“People are waiting to see what happens with interest rates because no one wants to get caught on the wrong side of rising rates,” Martinez said. “We saw a little stability in January and now we’re seeing an increase in inflow requests for fixed-rate and refinances. I think acquisition financing will pick up later in the first quarter.”

Property Sectors and Investor Appetites

Multifamily is fairly recession-proof, Martinez said.

“There’s still a housing shortage and people need a place to live,” Martinez said. “Plus, you can always adjust your rents.”

The industrial and multifamily sectors have been the most popular with investors for the past few years, which Martinez expects to continue.

“Office investment is still down because of the uncertainty of what ‘back to work’ means,” Martinez said. “Hospitality will pick up faster now that people are traveling again.”

While few transactions have taken place in recent months, Martinez anticipates some repricing of assets in the coming year.

“In the multifamily sector, we’re likely to see cap rates back to normal,” he said. “We’ll see a smaller swing in repricing in multifamily and industrial, but I think we’ll see differences depending on the asset class and the location.”

Eighteen months ago, cap rates were the same in tertiary markets as they were in places like downtown or midtown Atlanta, Martinez said, which was unusual.

“I think the larger markets and better assets will have smaller pricing increases or changes than lesser quality assets, especially in secondary and tertiary markets,” Martinez said. “We’re likely to see a greater variation in cap rates again that will be closer to where they’ve been historically.”

Debt Availability

Given the ongoing uncertainty about interest rates and the recession, Martinez expects the first and second quarters of 2023 to be relatively slow for borrowing for the multifamily sector.

“As soon as we get more certainty, people will get more comfortable and come back,” Martinez said. “A big source of capital that’s stepped back quite a bit is the debt funds and CMBS because of all the volatility. They were a huge factor 18 months ago. I see them coming back but maybe not as many or as big as they were then.”

In the past, when other lenders stepped back, Fannie Mae and Freddie Mac stepped forward, Martinez said.

“To some extent, that’s starting to happen now,” Martinez said. “If you want to finance multifamily now, the Agencies are there, especially to address the affordability crisis.”

Another reason Martinez believes the multifamily sector thrives even in adverse market conditions is the availability of financing from Fannie Mae and Freddie Mac.

“The agencies are countercyclical and provide market stability for multifamily,” Martinez said. “There’s not an equivalent lending source for the office market to fill in the gap when other sources of capital dry up.”

Multifamily Supply Dynamics

More than 400,000 apartment units were delivered in 2022, according to CoStar, and 494,000 are expected to deliver in 2023.

“The new development and supply will help alleviate some of the pressure on affordability for the multifamily sector,” Martinez said. “We expect a decline in deliveries in 2024 and 2025.”

Most of the new supply is in Texas and Florida, where job growth and population growth continues, Martinez notes.

“We need to look at some of the secondary and tertiary markets that are sometimes less able to digest new supply, but I think even those markets will adjust because deliveries will slow again after this year,” Martinez said.

The theme for 2023 is “back to normal” for the multifamily sector, which Martinez said is healthy.

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