Improving Conditions Lead to Increasing Demand
Freddie Mac's 2023 Multifamily Outlook expects demand to increase later in the year with moderate rent growth and increasing demand later as consumer confidence returns. One caveat in their forecast - their assumptions are based on a "soft landing" or mild recession. A more severe recession would have a bigger impact on the job market, negatively impacting consumer confidence and household formations, but so far demand seems to be normalizing in the New Year.
The report reiterates what we're already seeing in terms of seller behavior in the markets, stating: "borrowers are not as pressured to sell properties at a lower price point and may wait for more favorable investment opportunities."
There Is Seller Activity, But It's Harder to Find
On whole, sellers appear to be looking for some clear direction and easing. That's not to say deals aren't out there; we are seeing activity in the market, especially with institutional activity, but sellers are often moving deals very quietly. A lot of deals we're seeing are coming from strong relationships that we've built over time.
Underwriting Deals Requires Flexibility
In terms of underwriting, cap rates have been slow to respond to the higher rates. We expect there to be some increasing volatility as rates stay higher in the near term, impacting not only owners that need to refinance or sell, but also on the buy side. We've shifted our underwriting strategy to account for shifting markets and protect the downside, but we expect that more volatility will bring more opportunities for nimble buyers.
New Supply Could Impact Vacancies in Some Markets
There are a lot of variable in play, of course, and one of them is the amount of new units expected to come online this year.
Freddie Mac states: "the areas with the highest levels of new supply are most likely to have the largest increases in vacancy rates in 2023"
There is a lot of concentration of units in markets like Austin however; overall vacancy rates are expected to reman below long term averages. With our focus on Class B assets, we also think the new units could provide more value as we improve our assets and can bring better amenities to the market and grow rents but remain below the market rates of newly constructed units.
The expectation from Freddie Mac is that "predominately smaller southwestern and Florida markets" will outperform. This is, generally, what we're expecting as well; as we recently covered in our market outlook.
Key Takeaways:
• For 2023 multifamily fundamentals shouldn't fall off a cliff. There will be challenges, and 2023 could start slowly but rebound in the second half of the year.
• Multifamily construction levels remain extremely high, which could put additional pressure on specific markets.
• Freddie Mac expects the best performing markets to be predominately smaller southwestern and Florida markets, while bottom performing markets could be a geographically diverse mix of small and large markets that will see high levels of new supply.
• Cap rate spreads have compressed, putting upward pressure on cap rates. The resulting downward pressure on valuations has been met with some resistance from sellers, but there are deals on the market.
Despite facing a lot of the same headwinds we saw in 2022, and with a lot of new supply coming online this year, there's a good chance conditions will improve in 2023 and move into very positive territory beyond that. We'll continue to keep our deal flow active and find assets that fit our business model, focusing on the markets where we believe there's the best opportunity.
Stay tuned for more developments from Blue Lake Capital. Until then, Be Bold, Be Great and Keep Pushing Forward!
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About Ellie Perlman
Ellie Perlman is the founder and CEO of Blue Lake Capital, a woman owned multifamily real estate investment firm focused on partnering with family offices and accredited investors to build and preserve generational wealth. Since its founding in 2017, Blue Lake has successfully acquired and operated multifamily assets across high-growth U.S. markets, completing $1B+ in transactions.
At Blue Lake Capital, Ellie and her team work exclusively with family offices and accredited investors, offering carefully curated investment opportunities that emphasize long-term wealth creation, stability, and risk-adjusted returns. A defining aspect of Blue Lake’s investment strategy is its integration of advanced AI-driven analytics and data science into the entire lifecycle of acquisitions and asset management. By leveraging cutting-edge technology, the firm executes data-driven forecasting on market trends, asset performance, and tenant behavior, ensuring strategic decision-making and optimized returns.
In addition to leading Blue Lake Capital, Ellie is the original founder and host of "REady2Scale - Real Estate Investing" podcast, which provides insights into multifamily real estate, alternative investments, and finance.
Ellie began her career as a commercial real estate attorney, structuring and negotiating complex transactions for one of Israel’s leading development firms. She later transitioned into property management, overseeing over $100M in assets for Israel’s largest energy company.
Ellie holds a Master’s in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can learn more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.
*The content provided on this website, including all downloadable resources, is for informational purposes only and should not be interpreted as financial advice. Furthermore, this material does not constitute an offer to sell or a solicitation of an offer to buy any securities.
