The Best Places to Invest in Multifamily Real Estate in 2023
What are the Best Places to Invest in Multifamily Real Estate in 2023?
How do you go beyond “location, location, location” to understand the best places to invest in multifamily real estate? The market is ever-changing, and a good investment strategy has a lot to do with weighing all factors influencing the market, plus understanding the specific neighborhoods where you’re buying. We’ve compiled some takeaways from industry experts to help you make sense of it all.
Rent Growth Forecast for 2023-2027 via Multilytics & Origin
According to Multilytics, the 2023-2027 outlook is positive overall, with a compound annual growth rate (CAGR) of 0-2% nationwide. In terms of individual regions and markets, they predict that rents will grow the most during this period in Florida, Texas, the Southwest, and the South.
Source: Multilytics
As of 2023, Houston is forecasted to have a 1-3% 5-year growth in rent. Other markets in Texas that are predicted to see similar growth are Austin (3-5%), Dallas (2-4%), and San Antonio (2-4%).
Origin Multilytics also predicts 5-year rental growth in:
- Jacksonville (2-4%)
- Orlando (2-4%)
- Tampa (3-5%)
- Nashville (3-5%)
- Charlotte (2-4%)
- Raleigh (3-5%)
- Atlanta (3-5%)
- Colorado Springs (2-4%)
- Denver (0-2%)
- Phoenix (3-5%)
- Las Vegas (2-4%)
While the company acknowledged that 2023 would be a year of downturn in many markets, including Austin, Houston, Dallas, and San Antonio, their projections were mostly optimistic, talking about trading “short-term pain” for “long-term gain.”
So, how realistic are these projections? Now that we’re on the other side of July 2023, we can see how the first batch of predictions have panned out.
Multilytics’ recently published update confirmed that most of their projections were fairly accurate for January – July 2023. Rent increased regionally in all areas between January and July.
The highest YoY increase in rent growth out of their observed markets was in Dallas at 2.07%, followed by Houston at 2.07%. The biggest decrease for YoY rent growth was Phoenix at –3.61%. The Northeast and Midwest regions fared well overall, with respective 4.10% and 4.05% increases YoY in rent growth. Dallas and Houston rents behaved as Multilytics had expected.
While Multilytics was off in their predictions for Phoenix, the biggest outlier was Colorado Springs. The area was projected to have the highest YoY rent growth from Jan – July at 4.63% out of the Origin markets analyzed, but it actually decreased by 1.38%, leading to a 6.01% deviation.
So, what is Multilytics telling us about the best places to invest in multifamily real estate?
Specifically, Dallas and Houston performed as expected and showed strong growth. The Northeast and Midwest markets have also fared well in the first half of the year.
Investing in Multifamily in the Sunbelt States
Much of the projected and actual growth in rent is currently happening in the Sunbelt states. Which states are included on this map can vary based on who’s publishing it, but usually include Texas, California, Arizona, New Mexico, Oklahoma, Arkansas, Louisiana, Tennessee, Mississippi, Alabama, Georgia, Florida, South Carolina, and North Carolina. In more generalized terms, these are areas at or south of the 36th parallel.
On the Multilytics Rent Growth Forecast, we see that California, Florida, The South, the Southwest, and Texas all have positive compound annual growth rates (CAGR) for rent growth from 2023-2027, with Florida and the Southwest being the areas with the highest potential projected growth. While some areas in Florida and Arizona have not fared as well in recent months, this is expected to change in the next couple of years.
On Origin Investments’ Multifamily Markets to Watch in 2022 report, every market was in the Sunbelt: Phoenix, Tucson, Las Vegas, Austin, and Nashville all made the list.
PwC’s Emerging Trends in Real Estate
According to PwC, the top 10 cities to invest in real estate include:
- Nashville
- Dallas / Fort Worth
- Atlanta
- Austin
- Tampa / St. Petersburg
- Raleigh / Durham
- Miami
- Boston
- Phoenix
- Charlotte
Notice that 9 out of 10 of these cities are in Sunbelt states. The 10th city, Boston, is in the Northeast, a region that was reported by Multilytics to have substantial rent growth in Jan – July 2023.
In PwC’s 2023 Emerging Trends in Real Estate full report, the other markets to keep an eye on include San Diego, San Antonio, Orlando, and Houston.
The top 10 markets for homebuilding projects are:
- San Antonio
- Raleigh/Durham
- Tampa/St. Petersburg
- Austin
- Charlotte
- Dallas/Fort Worth
- Denver
- Houston
- Atlanta
- Washington, D.C.-Northern VA
PwC has grouped emerging trends in real estate by major groups and subgroups.
Magnets
Companies and people migrate to Magnet areas, where population and job growth tend to be quicker compared to other areas of the United States. Magnet areas are the highest ranking in terms of overall real estate prospects and make up 1/3 of the population base covered by the PwC report.
Within Magnets, there are three subgroups: the Super Sun Belt, 18-Hour Cities, and Supernovas.
Super Sun Belt
Most of the fastest-growing markets in the United States are in the Super Sun Belt. These areas boast large population bases and have solid economic performance. They have also recovered strongly and more completely from the pandemic recession.
Some of the hottest areas for real estate in this subgroup include Atlanta, Dallas/Fort Worth, Houston, Miami, Phoenix, San Antonio, and Tampa / St. Petersburg. All of these are in the top 20 on the PwC list.
18-Hour Cities
Even though the 18-Hour Cities have a higher cost of living, they’re still attractive areas due to development opportunities, lifestyle factors, and workforce quality. Compared to others in the rest of the Magnets category, workers are most productive here.
In this area and on the top 20 list are Charlotte, Denver, Salt Lake City, and San Diego.
Supernova
Aptly named for their explosive nature, these areas have seen sustained job and population growth, above-average levels of white-collar employment and economic diversity, and strong interest from investors as a result.
Austin, Nashville, and Raleigh/Durham are in this subgroup and made it on the PwC top 20 list.
Other Real Estate Market Categories
Other major categories are The Establishment, Niche, and Backbone.
The Establishment
These are the more long-lasting economic drivers. While Magnet areas are up-and-coming right now, they stand apart from the sustained economic contribution seen in The Establishment. Top 20 metro areas in this major category include Los Angeles, Boston, Seattle, and Washington, DC – Northern VA area.
Niche
As indicated by the name, Niche markets tend to have one thing that drives the economy over others. The markets aren’t as economically diverse or as hot in terms of growth, but they are good specialty areas. They can be home to boutique markets (smaller areas with bustling downtowns), Eds and Meds (college campuses and a big health care market), or convention and visitor centers. Orlando is the only top 20 city that is in this category.
Backbone
Backbone areas have opportunities for development and redevelopment, often having more moderate business and housing costs. Most of the subgroups are growing slower, but the Affordable West area is seeing a sharper increase in growth. None of the top 20 areas are in this category, but some cities of note in the Affordable West subgroup include Tucson, Albuquerque, and Sacramento.
Yardi Matrix Multifamily National Outlook – Summer 2023
According to Yardi Matrix, the national average of forecasted rent is projected to grow by 2.5% in 2023. Some of the highest projected metro areas are Central NJ, Auston, Charlotte, Salt Lake City, and Raleigh.
Houston is forecasted to have a rent growth of 2.3%. This is slightly under the national average. Dallas is projected at 2.1% for the year. For more specific numbers, download the Yardi Matrix report.
While we’ve seen some projection confirmations come in, it’s important to note that 2023 isn’t over. We’re publishing this at the end of the summer, which has seen a strong job market, increased housing demand, and subsequent rent growth. However, rising interest rates, potential economic downturn, and erosions in property values may have lasting impacts on the multifamily market we will see as we finish out the year.
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