Your December Newsletter from CALCAP!

CALCAP CONNECTIONS

December 2022

Principal's Corner

Freddie Mac See Healthy Multifamily Growth in 2023

The 2023 Multifamily Outlook from Freddie Mac expects the multifamily market to see healthy growth by the end for 2023. The strength of the apartment market from mid-2021 to mid-2022 was remarkable, with many markets seeing more rent growth during that time than the previous 5 years leading up to 2020. However, the report cautions that we are at an inflection point as we near the end of 2022. Renter demand has been declining since Q1 22, as well as renewal rates. The current labor market is a key driver to their forecast. They expect it to slow in 2023 but remain strong enough to create housing demand later in the year.

The report anticipates multifamily fundamentals will continue to decelerate through the first few months of 2023 but demand for housing will return later in the year, assuming the economy does not experience any recessionary contractions. They forecast vacancy to increase 30 bps to around 5.1% by the end of 2023. Vacancy rates have remained below 5% since 2011. Freddie expects rents to grow a healthy 3.9% next year. From 2012-2019 rent growth ranged from 3.6% to 6.1% annually across all markets. According to Moody’s Analytics, gross income is expected to increase 3.5% next year, in line with their forecasts for the inflation rate in 2023. Freddie Mac concedes that the biggest risk to the multifamily market is the state of the labor market. If the Fed can achieve a soft landing without a large impact on jobs, consumer confidence will return, and household formations will rebound. However, they caution that the chance of a recession remains “elevated.”

Cap rates have been slower to respond to interest rate increases. They historical “spread” between the 10-year treasury rate and apartment cap rates is around 340 bps. At the end of Q3 22, that difference had narrowed to 150 bps—the tightest spread since 2007. This implies that cap rates should continue to rise, putting downward pressure on valuations. According to the report, the first three quarters of 2022 showed treasury rates increasing 230 bps, while cap rates remained flat. This does not quite fit what we are seeing real time in the market. Anecdotally we have seen cap rates increase as much as 100 bps in most markets where CALCAP owns. This better ties out with the most recent CBRE Cap Rate Report showing cap rates on Class A properties have increased 72 bps in the last 6 months. Freddie Mac is predicting overall slight price declines in 2023.

The report stresses that the performance in the economy will be pivotal over the next few months. The result will have a profound impact on the multifamily market in the short-term. Freddie Mac still believes the current trajectory indicates multifamily is on track for a healthy 2023. We hope they are right as we remain cautiously optimistic. As we have said in the past, the Fed typically over-corrects and is usually not successful in pulling off a “soft landing.” Time will tell.

We wish you a Happy and Prosperous New Year!

Edward M. Aloe

Founder and CEO

626-229-9057

Take a listen to Episode 5 of The Real Estate Wealth Podcast

Ed interviews Angelo Mozilo, former Founder, Chairman and CEO of Countrywide Financial to get his thoughts on business, life and the future of America.

Latest Headlines...

2023 Housing Market Forecast and Predictions: Homebuying Costs Aren’t Coming Down

The slowdown in home sales transactions that began as mortgage rates surged in 2022 is expected to continue, leading to a moderation in home price growth and tipping housing market balance away from sellers. But with mortgage rates continuing to climb as the Fed navigates the economy to a soft-ish landing, a moderation in home price growth will not be enough for the housing market to be a buyer’s bonanza. Instead, home shoppers will enjoy advantages such as a growing number of homes for sale, but costs will remain high, challenging affordability at a time when overall budgets continue to be squeezed. If home shoppers and sellers have unrealistic expectations, they could find themselves in a stale-mate in the year ahead. The 2023 housing market could become a “nobody’s-market,” not friendly to buyers nor to sellers.

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For many potential first-time home buyers, 2023 will herald a delayed dream rather than a celebration as home costs exceed what’s possible on their budget and income. As fewer households make the jump to homeownership, increased rental demand could help keep rents moving higher. Nationwide, the median rental is projected to increase 6.3% in price, even as an influx of new multifamily housing helps to better meet rental demand. Renters looking to save in the year ahead may consider moving further out to the suburbs.

Renters looking to sign a new lease in 2023 should feel encouraged about this data, but still need to keep a close eye on the market and act quickly when they find a rental that fits their needs and budget. Rents are still higher than they were pre-pandemic, so tradeoffs and flexibility will still be necessary into next year. Renters facing a renewal should know that they’ve got more bargaining power this year and should carefully consider the prices of other nearby rental options when negotiating a lease renewal.

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Assuming the terminal rate is just right, and that core services excluding shelter inflation also shows signs of cooling in mid-2023, then we can forecast more upward pressure on mortgage rates in the first half of the year. The popular 30-year, fixed mortgage rate is loosely benchmarked to the 10-year Treasury bond. As the Fed continues to tighten monetary policy, that means more upward pressure on Treasury bonds and, therefore, mortgage rates — not the amount of pressure on mortgage rates that occurred in 2022, but just a little bit more.

Slighty higher rates imply sales trending further lower in the first half of the year because higher rates have a dual impact on sales: pricing out buyers who lose purchasing power and keeping some potential sellers rate-locked in. Prices will also continue to correct and reflect the new dynamic of less demand relative to slightly more, yet still well below historically normal, levels of supply.

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On the lighter side....

About CALCAP Advisors

About CALCAP

California Capital Real Estate Advisors, Inc., and its affiliate entities (CALCAP Asset Management, CALCAP Properties, CALCAP Lending, CALCAP Senior Healthcare, and CALCAP Strategic Opportunities, collectively known as “CALCAP”), is a California-based investment company founded in 2008 and headquartered in Pasadena, California. The Company sponsors alternative real estate investment opportunities focused on demographically driven housing. CALCAP has been able to consistently provide both individual and institutional investors with outstanding returns over the last 14 years. The Company uses a highly selective and disciplined investment approach, focused on delivering superior risk-adjusted returns. CALCAP currently has over $650mm in Assets Under Management. To learn more visit www.calcap.com.

Social Mission

CALCAP CARES is a 501(c)(3) private foundation organized to encourage employees to find a way to give back to the neighborhoods where we invest. CALCAP has created "GiveTime4Autism" as its initial program which gives employees the opportunity to donate unused vacation and sick days for a very worthy cause.