Morguard Corporation (TSX: MRC) released its 2023 U.S. Economic Outlook and Multi-Suite Residential Rental Market Fundamentals Mid-Year Update, offering a comprehensive analysis of the 2023 U.S. real estate market and highlighting trends to watch for the remainder of 2023 and beyond. Investors will continue to exhibit confidence in the U.S. multi-suite residential property sector over the near term, against a backdrop of relatively muted sales activity levels. Sales of multi-suite residential rental investment property will remain low over the near term, continuing the trend that began in the first half of 2022. The sales slowdown is mainly attributable to the high cost of debt capital, stringent lending requirements, and the disparity between vendor and purchaser pricing expectations.
“Investors will continue to look for acquisition opportunities in the multi-suite residential sector, given an expected strengthening of rental market fundamentals and investment performance over the medium-to-long term”, said Keith Reading.
Multi-Suite Residential Rental Real Estate
Investors are expected to continue to exhibit confidence in the multi-suite residential rental sector, as rental market conditions soften over the near term. Private capital and buyers with less of a reliance on low-cost will be generally more active. Meanwhile, institutional buyers will wait until interest rates level off and subsequently fall. It is anticipated that investment activity will pick up as the interest rate environment stabilizes either in the second half of this year or in early 2024.
Rental market fundamentals will soften over the near term, as new supply completions peak. Rental demand will be relatively robust but will fall short of new supply. Increasingly, renters will stay put instead of purchasing a home while interest rates remain prohibitively high. Rental market fundamentals will strengthen over the medium term, as demand catches up with the 40-year high new supply added across the country over the next 12 to 18 months. In 2022, the U.S. vacancy rate rested at an all-time low and rents climbed to a record high. Over the near term, a modest softening trend is forecast, following which market conditions will gradually strengthen.
Economic Factors
Economic growth is forecast to slow in 2024 following a two-year period of moderately healthy expansion. The forecast slowdown is due primarily to higher interest rates, above-average inflation, reduced credit availability, and stricter lending standards.
The U.S. labor market resilience of the recent past is expected to continue in the near term with the national unemployment rate holding firm while employment decreases modestly. Consumer spending is also expected to slow during the late stages of 2023 and early 2024.
The mid-year update revealed that the U.S. housing market will remain competitive in the near term, with buyers competing for a very limited supply of homes on the market.
“Existing home prices will remain high in the near term, which is to be expected given the cyclical nature of the market and current lack of supply,” said Keith Reading, Director, Research at Morguard. “Meanwhile, the U.S. labor market exhibited a measure of resilience recently, outperforming expectations in the first half of the year.”
Regional Highlights
- Washington-Arlington Alexandria (WAA)
The WAA multi-suite residential rental market is forecasted to stabilize gradually over the second half of 2023 and in early 2024. This is due to the continuation of the demand recovery that began towards the end of the first half of 2023. Demand had fallen sharply in the second half of 2022.
- Raleigh Metropolitan Statistical Area (MSA)
Raleigh’s multi-suite residential rental property inventory will surge with the peak of new construction deliveries in the near term, resulting in the moderation of rental growth.
- Atlanta-Sandy Spring-Roswell Metropolitan Statistical Area (ASSR MSA)
The erosion of ASSR’s multi-suite residential rental market fundamentals will continue over the near term, driven by the forecast rental demand moderation and a surge in new supply completions.
- Palm Beach Metropolitan Statistical Area (PB MSA)
In the multi-suite residential rental sector, new supply is anticipated to peak in 2023/2024 and will exceed demand over the near term, resulting in a downward pressure on rents.
- Chicago-Naperville Elgin Metropolitan Statistical Area (CNE MSA)
The CNE MSA’s multi-suite residential rental market outlook will remain relatively stable over the near term. New supply will be elevated as construction activity increased substantially in 2023, leading to modest rent growth and vacancy stabilization.
- New Orleans-Metairie Metropolitan Statistical Area (NOM MSA)
In the NOM MSA’s near-term multi-suite residential rental market, modest gains are forecasted, largely attributed to a combination of moderately positive demand patterns and a reduction in new supply completions.
- Dallas-Fort Worth-Arlington Metropolitan Statistical Area (DFWA MSA)
The DFWA’s multi-suite residential rental market is expected to soften over the near term, continuing the trend from 2022. The vacancy rate is forecasted to remain at a 13-year high level in 2024, significantly exceeding the rental demand.
- Denver-Aurora-Lakewood Metropolitan Statistical Area (DAL MSA)
The region’s multi-suite residential rental market is expected to weaken substantially for this and next year due to a surge of new supply completions, but it will strengthen over the medium term.
- Los Angeles-Long Beach-Anaheim Metropolitan Statistical Area (LALBA MSA)
In the LALBA multi-suite residential rental property market, conditions are expected to soften over the near term, continuing a trend that began in the latter half of 2022. This softening will be driven by a market dynamic where new supply will exceed demand significantly while the demand for rental accommodation has slowed in 2023.
The 2023 U.S. Economic Outlook and Multi-Suite Residential Rental Market Fundamentals Report is a detailed analysis of the 2023 real estate investment trends to watch in the United States. The full report, including an analysis of the real estate markets in Washington, Raleigh, Atlanta, Palm Beach, Chicago, New Orleans, Dallas, Denver and Los Angeles, is available at morguard.com/research.