2023 A Tough Year for Multi-Family Lending and Rental Demand

Several factors will drive demand for multifamily lending and rental demand in 2023. In terms of commercial lending escalating interest rates and property valuations uncertainties will be the primary drivers. Additionally the resizing of debt at loan maturities will require a creative underwriting approach or equity calls to avoid debt coverage shortfalls and potential negative amortization.
Housing affordability will be the major driver for apartment rentals with bargaining power shifting back to renters. Reportedly, 90 of the nations 100 largest cities experience declines in December including NYC. Consumer confidence is questionable as inflation and recession concerns continue along with shrinking Household formations and wage growth flattening each of which drive demand. As a result the flight to Class A apts. may diminish due to affordability and a return to rent concessions to attract new demand along with Class B alternatives.

As I reflect on both issues - rental growth and multifamily financing both factors are correlated. Buyers and borrowers may find challenges working with lenders due to rising interest rates and more diligent underwriting focusing on DCR and Debt Yield. Rental growth expectations and rising costs related to inflation may flatten increase rental and demand levels over the near term. This combination will continue to soften market rents and sales activity as the economy continues to experience the impact of inflation and rising costs of capital and upward pressure on operating expenses. In my opinion, these market uncertainties will potentially impact property values and reduce financing options and volume throughout 2023.