Multifamily investors and developers can anticipate a solid year of returns in 2022, according to the Winter 2022 U.S. Outlook Market Analysis by Yardi Matrix. Conditions are not expected to be quite as stellar as 2021’s exceptional performance, but high demand, a strong economy and an abundance of investment capital are likely to contribute to another robust year.
Among Yardi Matrix’s predictions for 2022:
Economic growth should continue at a healthy pace. While 2021’s 6% growth rate, the highest in 40 years, is not expected to be repeated in 2022, the underlying fundamentals that are essential for the multifamily sector are anticipated to stay strong. GDP growth is predicted by Evercore ISI to be 4% in 2022 based on continued monetary stimulus, rising wages, a surge in consumer wealth and savings, continued economic reopening, strong corporate profits and easing of supply chain issues. However, the headwinds of inflation and lagging labor force participation could both slow growth this year. On the other hand, if inflation continues to run high, commercial real estate, including multifamily properties, can be considered a hedge against inflation.
Rent growth expected to continue above long-term trends. The sharp rent growth of 13.5% nationally in 2021 is unlikely to be repeated. The analysts believe average rent growth nationally will be 4.8% in 2022, which is above the long-term average of 2.7%. The factors driving rents higher include increased demand after the pandemic, the strong job market, healthy consumer savings and the ongoing obstacle of high prices and limited homes for sale that keeps would-be buyers renting. More than 400,000 multifamily units were absorbed in 2021, which is approximately 50% more than recorded by Yardi Matrix in any other year. However, the pent-up demand from the pandemic has subsided somewhat and inflation may also moderate demand. Rent growth was especially driven by affordable secondary markets in the Southeast and Southwest, a pattern that is anticipated to continue in 2022.
Supply expected to continue to grow. Given the high rate of absorption in 2021, builders are no longer worried about oversupply of multifamily units. More than 750,000 market-rate multifamily units were under construction as of the beginning of 2022, along with 50,000 or more affordable units. Most of the projects in the pipeline are upscale units. Approximately 385,000 to 400,000 units are anticipated to deliver this year.
Capital market conditions will continue to be favorable. Both debt and equity are expected to be widely available in 2022. After a brief pause early in the pandemic, investors quickly began chasing multifamily developments. Approximately $166 billion of multifamily transactions were completed in 2021, a 75% increase over 2020. Price per unit reached a record high in 2021 of $188,000, surpassing the previous record of $157,000 in 2020. The only concern is that prices could be rising too quickly, yet the positive performance in the sector offsets these concerns. Property values are rising, driven by lower acquisition yields and increased net income as rents rise higher.
On the debt side, both Fannie Mae and Freddie Mac have increased capital allocations for 2022 and multifamily debt has driven record levels of lending by private equity funds. In 2021, an unusual development was the growth of private equity floating-rate mortgages originated via collateralized loan obligation (CLO) vehicles, which are pools of short-term loans on non-stabilized vehicles. CLO volume was $44.5 billion in 2021, far above the previous record of $19.2 billion in 2019. Approximately 70% of CRE volume is backed by multifamily development.
Quick Take: Yardi Matrix’s analysts expect another two years of growth in the multifamily sector, until interest rate and monetary policy tightening meant to control inflation induce a recession in 2024 or 2025.