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Recovered, But at a Crossroads

December 8, 2022
Authors: Greg Frick
Publishers: HFO Apartment Investor Newsletter | 2022

Over the last three years, the ups and downs in the apartment market have been unlike any other period I can remember. In 2020 came the outbreak of the COVID-19 pandemic and the onset of unprecedented challenges it would bring. In 2021, while working through the effects of the pandemic, the industry saw strong rent growth and a record-breaking year for multifamily investment sales. Then, 2022 brought the fight to curb inflation and the meteoric rise of interest rates. And during this whole period, there was also the constant pressure of the legislative changes and restrictions on owners and operators of rental housing. 

Even for thrill seekers, this up-and-down roller coaster the past three years has been a ride unlike any other. 

In the first quarter of 2022, even with 40-year highs in the various U.S. measures of inflation, the Federal Reserve still held the federal funds rate close to zero percent and was still buying billions of dollars of bonds every month to stimulate the economy. “Inflation was transitory,” was the reasoning behind the continued policy. The policy changed quickly, starting in March with the Federal Reserve raising the Federal Funds Rate and continued the policy throughout 2022. As of November, the rate is near 4.00%.  

This new reality of higher interest rates is adjusting underwriting assumptions and requiring significantly more equity or cash in the purchasing or refinancing of apartment properties. The changing financial markets make pricing assets more challenging, with the loan terms and requirements adjusting weekly.

Yet the fundamentals of the multifamily market are still very favorable and continue to improve. The new supply of multifamily units will slow down due to the high cost of construction coupled with the increased cost of financing such projects. The delta between existing apartment values and replacement costs will continue to increase, and it won’t get cheaper or easier to deliver new multifamily projects to the market.

The homeownership rate will decrease as the increase in interest rates will put entry-level for-sale housing out of reach for many potential buyers. This will add to the market’s already strong demand for rental housing units.

As Oregon Economist Amy Vander Vliet discusses on page 22, the economy is at a crossroads, and the path leading to recession is on everyone’s minds. These are uncertain times and setting a plan to achieve your investment goals and strategies will be more complex. The HFO team is ready to leverage our experience and in-depth market knowledge to help you get there in 2023.

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