2023 Berkadia Powerhouse Poll Outlook

February 16, 2023

2023 Berkadia Powerhouse Poll Outlook

February 16, 2023

Commercial Real Estate Professionals Expect Increase in Apartment Supply as Market Stabilizes to Pre-Pandemic Conditions

 Investors remain focused on strengthening portfolios across regions, demonstrating resiliency in uncertain market conditions, according to Berkadia’s 2023 Outlook Powerhouse Poll

NEW YORK – February 16, 2023 – Berkadia’s 2023 Outlook Powerhouse Poll finds that overall, 2022 marked an inflection point for the apartment sector. Notwithstanding, the multifamily market remains healthy despite weakening fundamentals, capital markets uncertainty, persistent inflation and recession rumors. The sixth-annual proprietary poll, conducted in December 2022 and January 2023, collected insights from 144 Berkadia investment sales advisors and mortgage bankers across 70 offices to assess expected multifamily real estate activity and opportunities for 2023 and beyond.

Although the construction industry is still feeling the lingering effects of the pandemic, apartment construction and deliveries are forecasted to swell in 2023. Particularly, the Northeast (87%), Midwest (79%) and Southeast (59%) have seen an increase in apartment supply over the last six months. In response to apartment deliveries hitting a 50-year high, Berkadia mortgage bankers and investment sales advisors (59%) expect that multifamily rental demand will outpace new apartment supply in 2023, decreasing from 80% last year. Deliveries are definitely one of the biggest near-term pain points for the apartment sector, but when you look at long-term demand, the nation is still undersupplied as a whole.

“As real estate investors adapt strategies and investment decisions to shifting market conditions, we remain sanguine about multifamily investing, fundamentals and operations,” said Berkadia Executive Vice President and Head of Production Ernie Katai. “While this shift is coupled with headwinds and economic uncertainty, this environment is nothing we haven’t conquered before, and in fact, we believe we are reverting back to national historic averages. While we’ve seen our industry certainly be challenged over the last year and becoming more politicalized, we believe multifamily is still a desirable asset class with the potential for attractive investor returns, resiliency and capacity to withstand trying times.”

Uncertain Market Conditions Show Resilience for Multifamily Industry

The commercial real estate (CRE) industry, like many others, has been affected by the potential of a looming recession. When asked if they expect a recession to occur in the next 12 months, many Berkadians said yes (51%), while others (35%) believe we are already in a recession. Inflationary pressures, rising interest rates and recession fears will extremely impact (54%) investment transaction activity, with the Southeast- (63%) and Southwest- (62%) based respondents feeling the most impact on their region.

To further pinpoint investor attraction, Berkadia’s survey dug into the primary focus of today’s investors. Across each region, a majority of Berkadians agreed that investors are holding off on investments due to market uncertainty, particularly in the Northwest (73%) and Midwest (68%) regions. However, investors are still active, and transactions are getting done albeit at a slower pace. Berkadia mortgage bankers and investment sales advisors in the Mid-Atlantic region (25%) report that investors’ primary focus is acquiring properties and Berkadia mortgage bankers and investment sales advisors in the Northwest (18%) report that investors’ primary focus is the recapitalization of assets versus direct acquisitions. Additionally, when asked what they predict in terms of institutional transaction volume this year, Berkadians believe it will be weaker (75%) than 2022. Moreover, we expect to see more distress in 2023 driven from redemption queues, floating rate maturities and expiring caps.

“Economic instability has been causing both short- and long-term disruptions for investors,” said Katai. “It’s more important than ever for investors to understand the trends shaping the CRE landscape, and our team is well equipped to provide valuable, actionable insights to help them see around corners. While we weather this “transitionary” period before the “new normal’ is defined, we remain focused and continue to be bullish on the multifamily industry as a whole.”

Millennials and Gen Z Shift Renting Patterns

When asked what generation the most active renters in their region was, Berkadians reported that Millennials and Gen Z led the pack with Baby Boomers and Gen X representing the smallest percentage of renters. Specifically, the Southeast (78%) and Northwest (70%) saw the highest percentage of Millennial renters, with the Midwest seeing an increasing number of Gen Z (42%).

Outside of cost, 66% of Berkadia professionals agree that location and security are the most important priorities to renters. As the workforce returns to operating in-person, renters have begun to migrate back towards major cities and metros. Berkadians agreed that major metropolitan areas continue to be the most attractive to investors (39%), followed closely by secondary markets (36%) and suburban areas (25%).

“It comes as no surprise that the Gen Z population is beginning to represent a larger number of renters throughout regions as they become more immersed in today’s workforce,” said Katai. “As we see interest rates and home prices continue to rise, we suspect that younger generations will continue to gravitate towards the renter lifestyle.”

Our survey showed that Baby Boomers are most commonly renting Single-Family Rental/Built-for-Rent (SFR/BFR) housing and Gen X are often renting Class A and Class B properties. Moving ahead, Berkadians believe that investor interest will focus on Class A (29%), Class B (28%) and True Affordable housing (17%). Specifically for Affordable housing, Berkadians believe that existing Affordable housing projects (41%) and rehabilitation of existing projects (29%) will be most attractive for investors over the next one to two years.

The Digital Evolution and Future of CRE

The CRE industry is poised for a digital transformation, and when asked how soon the industry will undergo a significant digital ramp up, Berkadians (44%) said the industry is already undergoing a digital transition. Forty three percent of Berkadia producers agree that certain technology and software programs are expediting the production process by aggregating data, pulling timely market information, conducting virtual inspections and easing the underwriting process.

“As a high-touch and relationship driven industry, CRE has historically lagged behind in terms of innovation, with producers and investors accustomed to in-person transactions,” said Berkadia Executive Vice President, Chief Information and Innovation Officer Damu Bashyam. “Though we may be in the early stages of a digital adoption compared to other industries, we’re in an environment where the next three to five years will be truly transformational.”

Additionally, Berkadians stated that investors consider technologically savvy property amenities to be very important (21%) and somewhat important (73%) when assessing or growing their portfolio. For example, in the past year the use of smart home features throughout units and communities has been on the rise.

“While no solution is perfect, technology provides data driven insights, equipping our advisors and bankers with the knowledge and vision to better serve our clients,” said Katai. “I’m excited about the digital future Berkadia is paving, marrying the high touch industry aspects to high tech, creating a hybrid approach for our team and investors.”

About the Powerhouse Poll:

The 2023 Outlook Powerhouse Poll data was collected in an online survey, facilitated by Berkadia through Microsoft Forms in December of 2022 and January of 2023, to assess anticipated commercial real estate activity and opportunities for the year ahead. The sample was based among Berkadia’s 65 offices throughout the United States, consisting of 57 investment sales advisors and 87 mortgage bankers, totaling 144 overall respondents. To read more in-depth data that was collected, please see our full Outlook Powerhouse Poll here.