The below multifamily-focused Greystone Insights is based on 10 Critical Questions for 2023 from Kevin Thorpe, Chief Economist, Cushman & Wakefield.
It may be a new year, but many of the same economic concerns remain, which has affected major decisions from job-hopping to home buying. Ever since the economy first reopened, there have been pressing questions about when the labor market would cool off to force remote workers back to the office and whether inflation would rebound or turn into a recession. Many of these questions have gone unanswered or have yet to fully play out, but 2023 may start to change some of that.
Eye on Employment
According to the U.S. Bureau of Labor Statistics, the unemployment rate in the U.S. was down to 3.7% as of November 2022, marking the lowest rate since the 1940s. Low unemployment paired with a 5.3% wage growth in Q3 may sound like markers of a healthy economy, but people who are sticking with their current jobs only out of fear of a looming recession is not a good sign. A better gauge of economic health is when confidence returns so people feel able to leave their jobs for better opportunities which will put pressure on wage competition.
As the quit rate declines, it will take pressure off of The Fed, and within six months of the quit rate bottoming out, analysts expect the job losses to stabilize which is when new job creation can begin and demand for all forms of property will follow. Previously, it has taken between 2-2.5 years for the rate to bottom out and at this current rate of decline since late 2021, it could bottom out by the end of 2023.
Home Prices Boost Multifamily Demand
The cost of buying a home skyrocketed during the pandemic as people were required to shelter in place, and while costs have started to come down, homeownership remains out of reach for many individual families as historic inflation has outpaced wage increases. Home prices would need to fall by more than 25% to make ownership more attractive than renting again, which would be a greater decline than the Great Financial Crisis which only saw home prices fall by 19.8%. The $471 difference between the average mortgage payment and rent is the widest gap in history which has contributed to favorable rental markets which is supported by the 22% rent-to-income ratio for multifamily REITs—below the 30% threshold set by HUD for what would be considered a cost burden. Rental delinquency rates are down 30 bps over last year as well which is a sign of improvement.
Shifting Housing Trends
The pandemic marked a cultural shift in attitudes on shared living situations as a majority of young adults in the US moved back home with their parents during the pandemic to save on housing costs due to job losses at a greater rate than at any other time since The Great Depression—even more so than boomerang millennials post-housing crisis in 2008. This has led to a surge in the market for more affordable living situations such as multifamily homes, but lending volume is down 16% from pre-pandemic levels.
Property Values to Increase
Once interest rates become more favorable again, property values should rise in the next three or four quarters which is why real estate markets are monitoring interest rates set by the central bank and the debt market recovery so closely. Market predictions anticipate that the Fed will pause rate hikes in the middle of 2023 in the 4.7-5% range and could begin lowering rates by the end of this year or early 2024.
Consumer Spending as a Signal
Analysts also advise watching consumer spending patterns which are is expected to slow overall in 2023, but retail centers are seeking out tenants that offer attractive fitness, medical, beauty, dining, or entertainment services to increase foot traffic following a 7.5% increase in consumer spending on recreational activities year over year in 2022. Currently, urgent care, dentistry, and veterinary businesses occupy 20% of shopping center retail space in just the last few years.
Commodities Impacting Construction Rate
From retail centers to multifamily homes, construction is an essential factor that has been slowed down by incredibly volatile supply chain bottlenecks and delays in recent years. Commodity pricing will likely remain elevated compared to pre-pandemic levels due to persistent construction backlogs, but once these prices come down—so will the volatility and uncertainty. The 40-week lead time for electrical equipment—up from 14-16 weeks pre-pandemic—is the most in-demand product category in construction.
Even a short economic recession could result in a decrease in commodity prices, but that would only be a result of reduced construction activity and demand. It is not just fear of recession that has kept workers in their jobs that are calling them back into the office, but employee attendance in vibrant neighborhoods has recovered three times faster than in neighborhoods that lack attractive restaurants and desirable retail environments.
Ultimately, the outlook for 2023 shows promise in that there are actionable methods of attracting consumers, renters, and workers that are not just driven by fear.