U.S. Macro Outlook: Mild Recession ≠ Pleasant



Looking Past the Near-term Headwinds, the Other Side Is Strong Following booming demand conditions, record low vacancy, and double-digit rent growth in 2021, the multifamily sector cooled off throughout 2022 which helped operating fundamentals re-balance to a more sustainable level. Supercharged household formation during the pandemic recovery began to throttle back, while job and income growth moderated amid high inflation and the uncertain economic outlook. Even abstracting from the new macro headwinds, demand was destined to cool from the blistering pace heading into 2022. Record demand growth (annual change in number of physically occupied units) of 662,000 in 2021 was easily the strongest on record, nearly doubling the average pace from 2018 2020. According to Axiometrics 4 , in 2022, demand shrank by 103,000 units, the first decline since 2007. New supply remained steady, with 346,000 new units delivered, close to the 2021 total and on par with the percentage rate delivered over the past five years. After reaching an all-time low of 2.5% in the first quarter, the national vacancy rate increased in the remaining three stanzas of 2022, ending the year at 4.9%—up 240 bps from 2021. The inflection in demand was the story of 2022. However, despite a softer start in 2023, we foresee a strengthening in demand throughout the year that will put year-end absorption in the ball park of 190,000 units. This is well above the 2000 2019 average of 167,000 units but down from the frenzied pace of the last two years. As the growth cycle gains steam, demand in 2025 should clock in around 265,000 units. Longer term, the multifamily demand outlook is positive thanks to a persistent undersupply of single-family housing and economics that should favor renting over homebuying for several years. The mortgage rate on a 30-year, fixed-rate loan is currently hovering between 6%- 6.5%, and with the Federal Reserve being uneager to revisit zero-interest-rate policies anytime soon, odds point to mortgage rates remaining tethered above pre-pandemic levels. Construction of new single family homes has slowed to a halt, so affordability will also remain a key factor for potential homebuyers, despite modest price corrections in the near term. New supply is emerging as the predominant theme for the multifamily market. With more than 900,000 units under construction—many of which are slated 4 Axiometrics is one source of multifamily data in addition to others like CoStar and Reis. Axiometrics and CoStar report on roughly 18 million units while Reis reports on about 12 million units. Each vendor has a different composition of tracked inventory across classes and markets, but all three have reported a downshift in demand. CoStar recorded positive absorption in 2022 of 144,000 units, down 80% from 2021. Reis reported that 140,000 units were absorbed in 2022, down 40% from 2021.

for completion in the next few years—there are more units underway than at any point since the 1970s. As a percentage of overall inventory, the next two years’ rates of supply growth would be stronger than any time over the past two decades. It is difficult to paint an accurate picture of supply risk without caveats on location. Broadly speaking, development is concentrated in high-growth Sun Belt markets, such as Austin, Miami, Nashville, Charlotte and Phoenix, though several markets like Seattle, Boston, Minneapolis and Denver rank highly as well. Of course, these are the same markets that have registered record demand for apartment units in recent years (both pre- and post-pandemic) and are also widely viewed to have some of the strongest demand drivers in the country, so not surprising to see developers ramping up supply in these fast growing cities. Beyond what is already baked into the pipeline, an economic recession—even a mild one—should give pause to further new supply, especially if development costs remain elevated in a high-interest-rate environment. Multifamily permits already began to taper off in late-2022, and we expect supply growth to fall below its long-run average by 2025.


-200 -100 0 100 200 300 400 500 600 700

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
















2006 Supply (Ths.) 2007 2008




Demand (Ths.)

Vacancy (%, right axis)

Source: Axiometrics, Cushman & Wakefield Research

The pullback in demand that began in 2022 will be exacerbated by a weaker labor market this year. In our baseline forecast, the unemployment rate increases from 3.4% currently to 5.8% by the end of 2023, implying a net loss of around 2.5 million jobs in the U.S. While this rate of unemployment is lower than experienced during the past two recessions, increased joblessness will nonetheless cause more would-be renters to double up with parents or roommates, likely resulting in a slowdown in household growth over the next two years. The wave of construction hitting the market as demand cools will drive vacancy rates higher in the next two years, reaching 6.7% this year


Made with FlippingBook. PDF to flipbook with ease