The Ultimate 2023 Multifamily Real Estate Investing Guide

Given the continuing rise in interest rates, the remaining curse of inflation and the lingering potential for a recession, you might be wondering what 2023 holds for multifamily investing. By some accounts, multifamily could be the star performer in commercial real estate in 2023.

As financial services giant JPMorgan Chase points out, multifamily currently ranks as the highest-performing asset class, with extremely low vacancy rates buoying the sector. And that status isn’t expected to change in 2023. Adding to the allure of multifamily is that housing demand remains high, and that multifamily property managers can make real-time rent adjustments in response to shifts in the marketplace.

In the new year, any smart commercial real estate investor would be wise to take a hard look at opportunities in the multifamily real estate market. In fact, the chief economist at the National Association of Realtors suggests higher interest rates may cause a slight overall dip in commercial real estate prices in 2023—which could represent a buying opportunity for some investors.

Is Real Estate a Good Investment in 2023?

Real estate can be a good investment in 2023, depending on which sector you’re focusing on.

Multifamily stands out as an asset class that is ripe for healthy gains in 2023. Joining multifamily in that category is the industrial sector, which continues to benefit from the growth of online retail.

 However, the office and hotel asset classes remain question marks, as they’re still rebounding from pandemic-inflicted trends. But even within these beleaguered sectors, some assets might perform well. For instance, grocery-anchored retail still ranks as an attractive segment of retail real estate.

Are Multifamily Properties a Good Investment in 2023?

Generally, multifamily properties promise to be not just a good, but a great investment in 2023.

An economist at real estate services company CBRE noted in November 2022 that multifamily properties had delivered an average annual return of 8.8% over the past five years. Further cementing the sector’s appeal, multifamily has demonstrated its might for decades. From 1992 through 2018, multifamily supplied the highest average annual return (9.75%) of any commercial real estate asset class, according to CBRE.

And even though multifamily rent growth is coming off historic highs of 10% or more, the growth rate isn’t likely to fall below its historic average of 3% to 4%, according to a 2023 commercial real estate forecast from the Urban Land Institute (ULI) and professional services firm PwC.

In 2023, multifamily housing should stay healthy due to the fact that 30-year, fixed-rate mortgage rates exceeded 6.6% in late 2023 and show no signs of a dramatic decrease. The higher cost of borrowing money to buy a house has driven away millions of would-be homebuyers and has kept many of them in the rental market (both multifamily and single-family rentals). The reluctance of would-be buyers to take on mortgage debt likely will continue into 2023 as long as the Federal Reserve keeps hiking interest rates.

One hurdle for multifamily investors in 2023 might be competition. A survey by ULI and PwC found multifamily and industrial to be the most sought-after asset classes in 2023. Another possible impediment: Fewer investors and lenders will supply capital for assets in 2023, the survey shows.

Despite those potential roadblocks, multifamily should reign supreme among commercial real estate asset classes in 2023.

Which Assets Do Well Amid Hyper-Inflation?

The U.S. continues to cope with levels of inflation not seen in decades. As of November 2022, inflation had cooled off but lingered at 7.1%, and today continues to contribute to economic worries.

Amid hyper-inflation, commercial real estate investors might be pondering which asset classes do well in this environment. Over time, real estate has been a robust hedge against inflation, with multifamily being one of the superior asset classes in that regard.

“Real estate works well with inflation. This is because, as inflation rises, so do property values, and so does the amount a landlord can charge for rent,” the Investopedia website explains. “This results in the landlord earning a higher rental income over time. This helps to keep pace with the rise in inflation. For this reason, real estate income is one of the best ways to hedge against inflation.”

That reasoning certainly applies to multifamily properties. This asset class serves as not only a hedge against inflation, but also recession. In part, that’s because renters aren’t as apt to relocate during economic downturns and are less inclined to buy homes. Plus, multifamily properties are positioned to increase rents more frequently (in good economic times and bad) than most other types of commercial real estate are.

What Will Happen to Interest Rates in 2023?

Even as inflation eases, the Federal Reserve continues to signal that it’s not done yet with hikes in interest rates.

In December 2022, the Fed yet again raised its benchmark interest rate by half a percentage point, pushing it up to a range of 4.25% to 4.5%. In 2023, the Fed expects to boost the rate by another three-fourths of a point. The Fed now anticipates the rate winding up at 5% to 5.25% at the end of 2023, above the 4.5% to 4.75% range it had projected in September 2022.

As a result of the Fed’s actions, interest rates for commercial estate loans should also rise. However, rates for multifamily financing historically have sat below lending rates for other types of commercial real estate.

Bottom line: The current interest rate environment shouldn’t deter multifamily investors from pursuing well-priced, well-located assets in 2023.

Multifamily investing is essential to hedge inflation. Contact the Broadmark team today about your next investment opportunity.