Written by Sara Hoffmann, Director of Multifamily Research at FreddieMac Multifamily
Economic conditions appear to be moderating as we head into 2024 and expectations are for the economy to achieve a soft landing. We expect job, wage, and gross domestic product growth to slow but remain positive, as inflation continues its downward trajectory. Similarly, we expect the multifamily market to remain sluggish as it works through what will likely be peak deliveries of new supply for this cycle in 2024, with rent growth expected to be positive but below the long-term average and vacancy rates higher than average. With interest rate stability, cap rates and property values should stabilize allowing buyers and sellers to agree on asset value to facilitate more transaction volume.
Assuming we achieve an economic soft landing, we believe the multifamily market will continue to see slow growth while it works to absorb the high level of new supply in 2024. As the overall economy slows leading to a softer labor market, multifamily demand is expected to remain positive but weaker compared with pre-pandemic rates. For 2024, our baseline forecast is for rent growth of 2.5% for the year, remaining slightly below the long-term annual average from 2000 to 2022 of 2.9%, according to RealPage. We expect the vacancy rate to remain relatively stable in 2024 despite what we believe will be the peak year for deliveries this cycle. For 2024, we forecast the vacancy rate to be 5.7%, 40 bps higher than the 2000-through-2022 RealPage average of 5.3%.
However, if the economy does not achieve the soft landing and instead falls into a recession, the multifamily market would likely see meaningfully lower market performance. Regardless of economic conditions, the pipeline of multifamily units expected to be delivered this year is extremely high, and if demand is lowered due to a recession, the overall multifamily market would face additional upward pressure on vacancy rates and downward pressure on rents. This is particularly true of markets that are facing extremely high levels of new supply.
Modest Origination Volume Forecast
The multifamily valuation and debt market remained sluggish in 2023, due to the increasing and volatile interest rate environment. While the Federal Reserve continued to battle high inflation rates, the hope at the beginning of the year for rates to start declining, or adversely a recession resulting in lowering interest rates, did not come to fruition. As a result, multifamily originations were down throughout the year as many investors waited on the sideline throughout the rate instability.
Stabilization of the interest rates, all else equal, should help buyers and sellers find the middle ground to get transactions done. But slower rent growth and the higher rate environment may continue to suppress multifamily valuations in 2024. These factors will inhibit the debt market to see a quick snap back to 2021-2022 origination levels. As such, Freddie Mac projects origination volume to increase roughly 30-33%, up to $370 billion to $380 billion in 2024, which puts it more in line with pre-pandemic levels.
Despite the short-term supply headwind, over the longer-term the multifamily market will continue to be supported by the overall shortage of housing, an expensive for-sale housing market, and the next generation of renters (Generation Z) entering prime renter age.