Contraction in multifamily lending will persist into 2023
Inflation fears, rising interest rates, and a cooling housing market have dimmed Freddie Mac’s multifamily market outlook for 2023.
The mortgage aggregator expects the multifamily sector to slow further in 2023 due to moderating rent growth, increased vacancies, and reduced loan originations for the year. Freddie Mac also anticipates property values to decline, but gross income growth will remain positive.
“Volatile capital markets and a rise in the 10-year Treasury rate have driven a contraction in multifamily lending in 2022 that will persist into 2023,” said Steve Guggenmos, vice president of research and modeling for Freddie Mac Multifamily. “Economic uncertainty and rising prices have led to waning housing demand. This, paired with elevated construction levels, will drive rent growth to level off and eventually normalize. This environment is putting downward pressure on property values, which have grown at a heightened pace in recent years.”
According to Freddie’s report, annual rent growth will likely end 2022 at around 6-8%, and gross income will increase at a 3.5% pace. While multifamily fundamentals remain strong, the vacancy rate is projected to rise modestly to 5.1%.
“Multifamily construction levels remain extremely high, which could put additional pressure on fundamentals in some markets,” Freddie Mac wrote in the report. “In 2023, Freddie Mac expects the best-performing markets to be predominately smaller southwestern and Florida markets. The bottom performing markets are a geographically diverse mix of small and large markets, many of which are expected to see high levels of new supply.”
Additionally, Freddie Mac expects origination volume to fall 5.5% to $460 billion at year-end, continuing a decline of 4-5% to $440 billion in 2023, given the economic uncertainty and volatile Treasury rate environment. However, fundamentals are predicted to rebound slowly in the second half of the year as the market stabilizes.