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According to leading experts, the forecast for the multifamily apartment sector remains strong for investors.
Throughout 2021 the demand for this type of housing grew, due to changing migration patterns and robust economic conditions, and this pattern is predicted to continue throughout 2022. In addition, Fannie Mae predicts a 3.2% growth rate in the U.S economy this year – and Goldman Sachs predicts even greater growth, as explored below.
Let's look at other economic indicators for the multifamily sector.
Rising Rental Rates
Last year, the Federal Reserves' direct bond purchases and increases in money supply were a driving force behind the increase in rental rates.
In 2021 many apartment owners had to give concessions and forgive rent when renters had lost income due to job loss or temporary layoffs related to the pandemic. These concessions and losses are working through the rent rolls and income statements. However, despite the pandemic and its negative impact on the economy overall, the multifamily apartment market remained one of the most resilient asset classes throughout 2021. Data shows that average rents increased by over 10% or more throughout many parts of the country.
The net operating income for 2022 should be higher than last year, as the workforce returns to normal and unemployment rates reduce. Increased rents will also offset the increased wages and expenses that will likely be seen in 2022; this year, an additional increase of 7% or more is predicted.
The Federal Reserve is expected to raise interest rates steadily throughout 2022. As of January 10th, 2022, the current 10-year Treasury note is 1.80%. The rate has increased substantially from early December of 2021 when it was at a low of 1.35%. Experts predict the 10-year Treasury note to fall somewhere between 2% and 2.6% by the end of 2022.
Coronavirus and Growth Forecast
Due to risks and uncertainty around the emergence of the omicron variant of the coronavirus, Goldman Sachs cut its outlook for U.S. economic growth to 3.8% for 2022. The coronavirus, worker shortages, and supply chain issues will continue to be risk factors for 2022. Bear in mind that the ideal growth rate is 2-3%.
Multifamily Projections for 2022
Despite the risks and uncertainties, the multifamily apartment sector is expected to stay strong throughout 2022. Multifamily debt markets have a lot of liquidity and will compress cap rates and offset the risks when interest rates rise. Investors should look for options to refinance or re-capitalize portfolios as rates increase and the window to reduce borrowing costs is minimized.
CBRE Bottom Line
CBRE believes that the increase in interest rates and availability of funds will drive investment in commercial real estate higher in 2022. CBRE predicts that investments in multifamily apartments will grow from 213 billion in 2021 to 234 billion in 2022. Increased interest rates may be reflected in an increase in cap rates by .25% to .50%. Even though rates are expected to rise, the multifamily apartment sector should continue to provide a positive return and steady cash flows for multifamily investors.