The U.S. economic outlook seems to be as perplexing today as it did coming out of the global pandemic. Extended interest rate hikes, large bank failures, persistent inflation, and a growing likelihood of a recession form a confluence of topics that investors must navigate.
With a wave of commercial real estate mortgage loans maturing soon and additional qualifications likely, multifamily housing development projects that have already broken ground may actually benefit from near-term macroeconomic headwinds. Here’s why:
1. Inflationary pressures that challenge consumers are expected to sustain renter demand for affordable multifamily housing
The numbers tell the story.
Two years of high inflation has kept homeownership out of reach for many, which will continue to drive demand for multifamily housing. Multifamily development projects expected to come online in 2024-2025 are expected to benefit from continued demand for this more affordable housing option.
2. Tighter lending standards and higher borrowing costs are expected to create supply/demand imbalances in the next few years
The lending landscape is rapidly changing. The credit that small and regional banks extended to borrowers during the low-rate atmosphere prior to the Fed’s inflation-fighting program has given way to a different lending environment.
Lenders interested in loan originations have narrowed their customer base to only the most well-capitalized firms, and many small and regional banks have exited the commercial real estate market entirely. The scarcity of credit today is expected to remove many participants from the market and drive down new construction.
As the economic environment evolves over the next few years, the lack of new supply may become a market reality, potentially creating a supply demand imbalance that could benefit newly completed multifamily development projects.
3. The extended development times and cyclical nature of commercial real estate appear to be good tailwinds for multifamily development projects.
Multifamily projects in development that are scheduled for completion within the next few years are likely to feel minimal impact from current near-term macro events.
In fact, developers building into the current environment should benefit from declining costs. Then as projects complete in the next 18-24 months, those development projects may encounter an improved lending environment and a supply demand imbalance due to a limited supply of new construction.
Multifamily developers with strong balance sheets are less concerned with short-term economic challenges and instead, are more focused on generating returns during intermediate and longer-term timeframes. Ironically, timing may be on the side of these developers at the very moment when the investment landscape appears gloomy to so many.
Conclusion
When considering these three factors, multifamily development projects offer a compelling commercial real estate strategy. Due to various economic and demographic headwinds, the renter pool remains deep for multifamily units. Additionally, thanks in part to the longer time horizons of multifamily projects, the intermediate and long-term trends appear to be favorable for multifamily development.
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