Apartments Are Facing Five Headwinds and Benefiting From Three Tailwinds This Year

The rental housing industry has seen its fair share of ups and downs over the past few years. As we settle into 2023, property managers, owners, developers and stakeholders should continue preparing for what may come through the remainder of the year.

Following the unprecedented growth of 2021, the rental housing industry embarked on a path back toward normalcy in 2022. The year ended with conditions cooling in many, but not all, markets. So far, 2023 has been marked with continued economic uncertainty fueled in large part by inflation and interest rates. The year has also seen a dramatic uptick in government scrutiny and pursuit of adverse housing policy, from federal officials down to city councils and everywhere in between.

Here are some of the most significant headwinds and tailwinds the industry can expect to see throughout the remainder of the year.

Headwinds

The overall economic uncertainty and volatility over the past few years has impacted nearly every industry, and we can expect some continued instability throughout 2023.

Labor market challenges

Labor market challenges are expected to continue this year, with the final 2022 jobs report confirming the strength of the labor market. Unemployment rates remained near 50-year lows, and initial claims for unemployment sat at levels consistent with a tight labor market.

Simply put, multifamily employers can expect to be faced with the challenge of not only staffing up but also attracting the right employees. As of fall 2022, the job opening rate in the real estate sector increased over 3 percentage points since the onset of the pandemic. It’s also taking longer to fill apartment jobs, with the median duration to fill a job posting sitting at 34 days, up from under a month in 2019. Companies have already shown a heightened focus on employee recruitment and retention, which will continue to be top of mind this year.

But there is potential for good news – overall, we’ll likely start seeing the labor market indicators return to average levels by the end of 2023. And by 2024, the Gross Domestic Product’s (GDP) growth rate should be more consistent with longer-term averages.

Inflation and interest rates

While the economy’s future remains murky, those in the industry should be prepared to operate under high inflation and high interest rates for quite some time. The U.S. has been experiencing record-high inflation levels since the worldwide increase in mid-2021, so it’s no surprise that it will continue to be a key factor to watch.

Though down from a peak of 9.1 percent?in June 2022, Federal Reserve Chairman Jerome Powell has indicated that bringing inflation down to the desired 2 percent?“has a long way to go and is likely to be bumpy.” His latest remarks bring forth the possibility of higher rate hikes if sufficient progress isn’t made in taming inflation.?

One of the most significant impacts of the heightened rates has already been highlighted in the for-sale housing market. Soaring home prices combined with the lack of inventory have resulted in weaker home sales, with occupancy rates projected to decrease through 2024.

Supply and demand

Our nation’s housing affordability challenges continue to be fueled by a long-standing supply and demand imbalance. Recent NAA/National Multifamily Housing Council research reveals that the U.S. needs to build 3.7 million new apartments by 2035 to address the existing housing deficit and fulfill future demand. Further, the U.S. lost 4.7 million affordable units priced under $1,000 between 2015 and 2020.

The past few months have seen some reprieve in this imbalance and the most significant influx of new apartments in almost 40 years is expected to arrive in the year ahead. If apartment deliveries occur as expected, conditions could ease in those respective markets.

Regulatory environment

Signs also indicate that housing concerns will remain a hot issue in policy conversations??????this year. Advocates and lawmakers nationwide are already pushing a number of problematic measures, and the Biden Administration’s Blueprint for a Renters Bill of Rights will likely spur states and localities to continue embracing adverse policies. These measures, including rent control, source of income requirements and restrictions on application fees and resident screening?are detrimental to development and overall housing affordability, as research and real-life case studies have shown time and again.?

Nationally, the divided Congress is driving the White House to pursue action through their available levers, namely federal regulatory agencies. This could result in increased regulatory and legal scrutiny on the industry, adding another unnecessary and complicated layer to the operation and development of rental housing. Already, the Federal Trade Commission, Consumer Finance Protection Bureau and Department of Housing and Urban Development have taken actions based on the President’s blueprint. More agencies, including those that typically do not interact with the rental housing industry, are expected to act in the coming months.

Though it is impossible to know the outcome of legislative measures and regulatory actions in advance, the preponderance of adverse proposals across levels of government presents challenges that could impact portfolios of all sizes, from mom-and-pops to larger corporations.

Possible recession

As for the economy, most forecasters have predicted that there will certainly be a recession in 2023, likely in the summer or fall. However, thanks to other strong economic indicators, we can expect it to be mild and short, which will help alleviate the industry concern of overall expenses outpacing rent growth.

Tailwinds

Demographics

If there aren’t significant setbacks in the labor market, the apartment sector is likely to see positive growth. This is especially true in areas that tend to have consistent demand even during economic downturns, such as moderate income and workforce housing.

The industry can also expect to benefit from favorable demographics over the coming months and years. Although many older Millennials are already homeowners, younger Millennials who are ready to settle down may opt to rent single-family homes. Moreover, with more than 20 percent of the U.S. population identifying as Gen Z, which includes individuals aged 10 to 25, there will likely be a steady demand for apartments for the foreseeable future.

Immigration could also play a key factor and drive apartment demand past expected levels. After grinding to a halt during the COVID-19 pandemic, immigration levels have remained sluggish. Should levels return to historical norms, there is potential for a surge in apartment demand. While several factors—including immigration policy and global conflicts—make future immigration an unknown, this is an important aspect to continue to monitor due to its outsized impact on rental housing markets.

Technology and innovation

Another element to keep in mind is the continuous technological innovation, within the rental housing industry and beyond. With the rise of virtual tours, resident portals, mobile apps and online leasing, rental housing joins many other industries that??are navigating the implementation of Artificial Intelligence.

We’ll continue to see property managers and owners turn to technological advances to solve certain issues, whether it’s to streamline apartment operations or develop better mental health training for employees. Many of these advances and solutions will help enhance—and in some cases, revolutionize—?the experience across the industry, as well as help improve returns.

While technology can certainly never replace the value of direct human contact in rental housing operations,?it can certainly help supplement an organization’s talent pool amid tight labor market conditions. Though positive experiences undoubtedly?improve resident retention, tools like virtual tours and resident portals can help take some of the pressure off understaffed properties.

Sustainability considerations

The conversation around sustainability can also be expected to continue in 2023, as we’ve seen an increase in the demand for more environmentally friendly housing options. ESG is gaining attention nationwide from both potential residents?and potential investors.?Several prominent business voices have expressed support for ESG investing, often highlighting its role in future risk assessment and potential protection from the costs of major accidents or pollution.

As a result, green construction may see increased profits and overall interest in the global market. However, implementing environmental considerations can be expensive, making the shift less viable for smaller owners and developers.

Looking Ahead?

As we move through the year, investors, developers and stakeholders should keep a close eye on the labor market and inflation trends as both will impact overall demand and affordability. Developments in the economy will also be important as we prepare for a mild recession in the coming months. It is also critical to stay up to speed on regulatory or policy changes that could impact rental housing operations.

With a heightened focus on investing in technology and services, not only can the industry improve the resident experience and retention rates, but also supplement existing talent amid a challenging labor market and prolonged staff vacancies. Such innovations also have the potential to attract a new, younger class of workers and residents with technological investments.

But we cannot lose sight of the bigger picture: the U.S. must address the supply and demand imbalance in order to improve housing affordability. The industry must remain engaged in ongoing advocacy efforts and help educate policymakers at all levels of government about the importance of responsible, sustainable housing policy. In large part, the nation must reduce barriers to apartment construction.

While we can’t predict exactly what’s in store for the remainder of 2023, we can be prepared. We will see a number of similar challenges already at the forefront, yet there will be continued opportunities??for innovation and planning to make a positive long-term impact on an ever-evolving market and industry.