Small Multifamily Investment Trends Report Q2 2024

Small Multifamily Investment Trends Report Q2 2024

Valuations and Cap Rates Stabilize as Fundamentals Support Growth

Key Findings

  • Small multifamily valuations held steady over the last quarter.
  • Cap rates fell for the first time in nearly two years, sliding 5 bps.
  • Credit conditions remain conservative as debt yields rose to 9.5%.

State of the Market

In the first quarter of 2024, the small multifamily subsector continued to fall in line with pre-pandemic norms, resuming patterns frequently seen before the historic multifamily boom years of 2021 and 2022.


Across the multifamily real estate sector, distress has remained limited. According to Trepp, the delinquency rate of multifamily loans in CMBS transactions was 1.8% at the end of the first quarter of 2024, down from 2.6% at the end of the previous quarter. Trends found in small multifamily properties tell a similar story. According to Freddie Mac, 97.8% of its small balance multifamily loans were either current or less than 60 days delinquent through February 2024. There may also be light at the end of the tunnel for asset pricing. Compared to last year, cap rates are higher, and valuations sit lower. However, when measured against the previous quarter, both metrics show improvement, with cap rates falling slightly and asset prices holding steady.


In the quarters ahead, small multifamily is likely to see steady improvement. Lending standards remain conservative, and the market consensus that there will be six rate cuts in 2024 has faded. Although many anticipate more hawkish monetary policy in the months ahead, multifamily’s structural strength has historically helped it withstand heavy headwinds. When the Federal Reserve cuts interest rates, multifamily investment activity is likely
to see a bounce.

Lending Volume

Elevated interest rates continued to impact small multifamily lending volume in the first quarter of 2024, as compared with the highs of recent years. The $44.4 billion year-end 2023 estimate of new multifamily lending volume on loans with original balances between $1 million and $9 million1  — including loans for apartment building sales and refinancing — represented a significant deceleration from the record-breaking 2022 total of $90.1 billion (Chart 1).

Thus far in 2024, a rapid bounce back does not appear in the cards — but neither does a further pullback. Through the year’s first quarter, small multifamily originations are on pace to hit $44.7 billion in 2024, a slight increase of 0.6% over last year.

Sustained high interest rates are the primary factor weighing down origination volumes, and they impact the market in several ways.


First, it widens the bid-ask spread (the difference between what a buyer is willing to pay and what a seller is willing to accept). Amid higher capital costs, potential buyers are seeking larger discounts. At the same time, a lack of multifamily sector distress has meant fewer owners have been motivated to sell if they do not receive an offer that meets their perception of fair value. Further, according to Yardi Matrix, loan extensions have been a common feature of the current lending environment, simultaneously suppressing new originations and distress.


Altogether, lower transaction activity, more frequent loan extensions, and reduced incentives for refinancings have all contributed to decreased origination volumes through 2023 and into early 2024.

1 All data, unless otherwise stated, are based on Chandan Economics’ analysis of a limited pool of loans with original balances of $1 million to $9.0 million and loan-to-value ratios above 50%.

Loans by Purpose

A high interest rate environment makes cash-out refinancing less attractive. When interest rates are favorable, borrowers often use accrued equity in their properties to finance subsequent acquisitions. In high interest rate environments, cash-out refinancing may result in a voluntary increase in debt servicing costs.


After the refinancing share of originations reached a high of 75.6% in the third quarter of 2022, it has fallen in three consecutive quarters, landing at a low of 60.5% in the second quarter of 2023 (Chart 2). The refinancing share of originations has been normalizing over the past three-quarters of available data, ranging between 66.8% and 72.7%.

Arbor Small Multifamily Price Index

Through the first quarter of 2024, the Arbor Small Multifamily Price Index shows that small multifamily asset valuations were down 4.3% from a year earlier (Chart 3). While annual price growth remains negative, the first-quarter reading marks an improvement from the prior two quarters, where annual price declines reached above 9%. Further, quarter-over-quarter, prices held effectively flat, falling by just 0.2% in the year’s first three months. The first-quarter movement comes as expense growth has narrowly outpaced property-level incomes, which weighed against valuations, even as cap rates ticked down by a few basis points.

Following the small multifamily sector’s peak in the third quarter of 2022, asset prices have declined in six consecutive quarters, dropping 11.8% in aggregate value. Despite recent declines, small multifamily valuations today are still 19.9% higher than before the pandemic.

Cap Rates & Spreads

In the first quarter of 2024, small multifamily cap rates averaged 5.7% — declining quarter-over-quarter for the first time since mid-2022 (Chart 4). The marginal decline of 5 basis points represents a surprising shift in direction. Similar trends have also been reported for prime multifamily properties, an indication that recent patterns in rising cap rates could be reversing sector-wide.

The small multifamily risk premium, best measured by comparing cap rates to the yield on the 10-year Treasury, approximates the additional compensation that investors require to account for higher levels of risk. This risk premium widened by 23 bps in the first quarter of 2024, reaching 156 bps (Chart 5).

The first quarter increase arrives as 10-year Treasury yields averaged 4.2% over the year’s first three months — down from 4.5% in the fourth quarter of 2023. Despite the slight increase, the current risk premium is less than half of the average risk premium of 370 bps observed between 2015 and 2019. Meanwhile, the cap rate spread between small multifamily assets and the rest of the multifamily sector, a measure of the risk unique to smaller properties, narrowed by 10 bps during the first quarter to finish at 28 bps (Chart 6).

Expense Ratios

Expense ratios, measured as the relationship between underwritten property-level expenses and effective gross income, have remained stable in recent quarters. In the first quarter of 2024, expense ratios in small multifamily properties receiving financing averaged 40.7% — rising slightly from the 39.7% observed during the prior quarter (Chart 7)Expense ratios peaked at 43.2% in the first quarter of 2023, just as property insurance prices sharply increased. However, expense ratios have quickly come back down to a normal range. Over the past four quarters of available data, expense ratios have deviated by less than a percentage point — ranging between 39.7% and 40.9%.

Occupancy Rates

In the first quarter of 2024, small multifamily properties receiving financing had an average occupancy rate of 96.6% (Chart 8). In each of the past two quarters, small multifamily occupancy rates declined, falling 127 bps in total, although they remain slightly higher than where they were a year ago.

Small multifamily properties have a 2% higher occupancy rate than other types of multifamily real estate. This trend is supported by the relationship-driven nature of small multifamily owners. According to a recent report by the Terner Center for Housing Innovation at UC Berkeley, a majority of small multifamily property owners report that at least half of their rental units were leased at below-market-rate rent prices in an effort to retain quality tenants.

Leverage & Debt Yields

Debt underwriting standards remained tight through the first quarter of 2024. Loan-to-value ratios (LTVs) slid by 179 bps from the previous quarter, settling at 57.9% (Chart 9). Small multifamily LTVs have generally declined since the onset of the pandemic. After hitting a record high of 69.2% in the fourth quarter of 2019, they have dropped in 11 of 17 quarters. In that time, average LTVs have decreased by 11.4 percentage points, highlighting that lenders require more substantial equity cushions when trends in valuations are volatile.

Average debt yields for small multifamily loans continued climbing higher in the first quarter of 2024, reaching 9.5% (Chart 10). Small multifamily debt yields have risen in each of the past seven quarters, hitting their highest point in nearly a decade. While cap rates and debt yields are higher than a year ago, debt yields have increased more substantially. In the first quarter of 2024, the spread between debt yields and cap rates widened to 382 bps —  the most significant difference since 2013 (Chart 11).

The inverse of debt yields, the debt per dollar of net operating income (NOI), for small multifamily loans fell again in the first quarter of 2024. Small multifamily borrowers secured an average of $10.49 in new debt for every $1.00 of property NOI, a decline of $0.21 from the previous quarter and its lowest level since 2014.


The small multifamily subsector’s stronger-than-average occupancy rates provide a stable foundation that will allow property owners to hold steady through the current high interest rate environment. As evidenced by the recent stabilization of asset prices and cap rates, as well as an uptick in large investor buying activity, there is growing confidence that the sector is rebounding from its cyclical bottom. For the small multifamily sector, interest rate headwinds will likely create a bumpy road to recovery in 2024, but smoother pavement lies ahead.

For more small multifamily research and insights, visit

All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

Single-Family Rental Investment Trends Report Q1 2024

Single-Family Rental Investment Trends Report Q1 2024

SFR Construction Starts Soar to a New High as Cap Rates Jump

Key Findings

  • SFR/BTR construction starts reached a record high of 75,000 in 2023, signaling a surge in development.
  • Renewal rent growth remains strong while new leases revert to seasonal patterns.

  • Cap rates jumped to 6.3% as the benchmark interest rate remained elevated.

State of the Market

While high benchmark interest rates have impacted all commercial property types, the single-family rental (SFR) sector continues to fare better than most, with home prices remaining resilient and delinquency rates holding at rock-bottom levels.

SFR construction has been the sector’s greatest strength as affordable access to homeownership has decreased substantially over the last few years. According to data from the Atlanta Federal Reserve Bank, buying a home is about 37% less affordable today than it was at the onset of the pandemic. As a result, developers are leaning into build-to-rent (BTR) projects, driving the number of SFR/BTR construction starts to an all-time high.

A combination of high barriers to homeownership and the addition of more purpose-built SFR communities has led to an increase in lifestyle renters. Compared to existing SFR households, new renters entering the sector are younger, less likely to have started a family, and earn an average of $11,000 more per year.

Performance Metrics

CMBS Issuance

Following a historic run of investment over the previous two years, SFR issuance in the commercial mortgage-backed security (CMBS) market slowed during 2023. According to Finsight, SFR CMBS issuance totaled $713 million in the fourth quarter of 2023 — sliding back down from the $1.0 billion recorded in the prior quarter (Chart 1).

Issuance totaled $2.8 billion for the entire year — the lowest annual sum on record since 2013. While CMBS activity is unlikely to return to 2021 levels in the near future, forecasts indicate that 2024 will be a more active year. Credit rating agency KBRA projects that market-wide CMBS issuance will improve by 23.6% in the year ahead.

Originations by Purpose

Driven primarily by the interest rate environment and a lack of demand for refinancings, new acquisition loans have emerged as the primary purpose for SFR originations in recent quarters. According to Fannie Mae, new loans intended for purchasing accounted for a majority (59.7%) of SFR lending activity in 2022 for the first time since 2018 (Chart 2). Through the third quarter of 2023, the purchasing share of originations has continued to soar, rising to 77.3% — the highest share on record going back to 1999. Meanwhile, rate-and-term refinancing loans, which accounted for 47.3% of originations as recently as 2020, account for just 6.1% of 2023’s lending activity.

According to an analysis of Fannie Mae data, the dollar volume of rate-and-term refinancings fell by 85.7% during the 12 months ending in September 2023 compared to the prior 12 months (Chart 3). Cash-out refinancings also dropped by 79.5%. Meanwhile, investor single-family purchases fell by 43.6%. The slide in SFR purchasing activity has been proportional to declines observed throughout the rest of the housing market. Single-family home purchases by first-time and non-first-time homebuyers fell by 39.0% and 35.5%, respectively.


Occupancy rates across all SFR property types averaged 94.4% in the fourth quarter of 2023, remaining unchanged from the previous quarter, according to U.S. Census Bureau data (Chart 4). DBRS Morningstar reported a similar SFR vacancy rate of 92.8% in November 2023.

Rent Growth

According to data from DBRS Morningstar, vacant-to-occupied (V2O) annual rent growth resumed a pattern of seasonality that was commonplace before the pandemic. Through October 2023, V2O rents are up just 0.7% from a year earlier (Chart 5). With V2O rent growth having now slid for five consecutive months, its recent performance matches the 2015-2019 trend in which price pressures peak in the early summer and reach a bottom in the early winter.

Meanwhile, annual rent growth of SFR lease renewals has gradually decelerated from record highs. After renewal rent growth peaked at 7.9% in July 2022, the pace of its increase has slowed in 11 of the last 15 months. Through October 2023, renewal rent growth increased 4.9% — a slight elevation from the 2015-19 average of 4.3%. Further, October was the first time in 33 months that SFR renewal rent growth failed to eclipse 5.0%, a departure from a prolonged period of sustained gains.

Cap Rates

SFR cap rates ascended again in the fourth quarter of 2023, jumping 22 bps to settle at 6.3% (Chart 6).1 Cap rates have now risen in four of the past six quarters, increasing by a total of 93 bps in that time. SFR cap rates have now hit their highest point since the second quarter of 2020. With interest rates still elevated, investors have been broadly revising their yield requirements.

The spread between SFR cap rates and 10-year Treasury yields approximates the SFR risk premium. While SFR cap rates rose in the fourth quarter, Treasury yields jumped slightly, causing the SFR risk premium to slide to 180 bps (Chart 7). From the previous quarter, the SFR risk premium shrank by nine bps. Further, the SFR risk premium sits just 12 bps above its all-time low of 169 bps reached one year ago. Meanwhile, the spread between SFR and multifamily properties widened slightly by 10 bps, averaging 88 bps in the fourth quarter of 2023.


There are consistent differences between the average assessed property values on mortgages originated to single-family owner-occupants versus single-family investors. Underwriters consider factors such as vacancies, turnover, and management-related expenses that owner-occupied units do not have, contributing to lower assessed values for rental units. Additionally, investors are incentivized to target value-add assets rather than paying top dollar for existing value.

Through the third quarter, the average valuation of a single-family rental that had received a Fannie Mae mortgage in 2023 was $343,498 — down 3.2% from the 2022 average (Chart 8). Average valuations for owner-occupied units increased 3.3% during the same time, reaching $415,281. Subsequently, the average underwritten valuation gap between the two groups of properties has increased to 17.3% through the three-quarters mark of 2023 — its widest point since 2012.

The drop-off in SFR valuations on Fannie Mae mortgages is the likely result of investors becoming more selective. Investors want to have a high degree of confidence that their asset will appreciate over the short term to justify making a purchase. In a housing market with fewer trades, many investors require higher yields and lower prices to execute an acquisition.

Debt Yields

Debt yields, a key measure of credit risk, jumped during the fourth quarter of 2023, rising by 33 bps to land at 10.3% (Chart 9). The increase marked the sixth time debt yields have risen in the past eight quarters, highlighting that lenders have remained cautious in an unsettled investment climate. The rise in debt yields in recent quarters translates to SFR investors securing less debt capital for every dollar of property-level net operating income (NOI). Through the fourth quarter of 2023, SFR debt declined to $9.69 for every dollar of NOI, a decrease of $0.33 from the previous quarter and a drop of $1.29 from the same time last year.

Supply & Demand Conditions

Residential Distress

Even with mortgage rates reducing homebuyer demand, there is an equal (if not greater) impact on housing supply. According to a July 2023 analysis by Apollo, a majority of mortgages outstanding had an annual interest rate below 4.0%. The difference between what homeowners pay on existing mortgages and what they would have to pay on a new mortgage is often significant. As a result, the housing market is locked into a so-called golden handcuffs effect.

Despite fewer buyers in the market, the dearth of available inventory means that sellers are still receiving favorable pricing. Further, the labor market remains robust. Altogether, these factors are leading to a housing market distress environment that is practically nonexistent. According to the Federal Deposit Insurance Corporation (FDIC), mortgage default rates fell to a new post-financial crisis low of 1.2% in the third quarter of 2023, declining four bps from the prior quarter (Chart 10).

Evidence suggests that distress within the SFR sector mirrors the broader single-family ecosystem. According to DBRS Morningstar, within rated SFR CMBS transactions, only 3.2% of loans were delinquent in November 2023 — nearly half the 6.3% rate reported at the end of 2022 (Chart 11).


BTR communities have become a defining feature of the SFR sector. Through the fourth quarter of 2023, BTR production remains robust. Over the past 12 months, BTR accounted for 7.9% of all single-family construction starts, remaining near the record high for the product type (Chart 12). For comparison, before the SFR sector materialized in the aftermath of the 2007-09 recession, the BTR share of single-family construction never eclipsed 3.1%. By unit count, there were 75,000 BTR construction starts in 2023 — another all-time high and an increase of 8.7% from the 2022 total demonstrating a sustained surge in development.

Tracking Demand

Google Trends can identify potential markets for high SFR demand by tracking the popularity of the search term “homes for rent.” In the fourth quarter of 2023, Memphis, TN, ranked highest in search volume for the term (Table 1). All the top 10 metros with the highest number of searches in Google for “homes to rent” are in five southeastern Sun Belt states (Tennessee, Georgia, South Carolina, Alabama, and North Carolina). While SFR communities have succeeded nationwide, the Southeast remains the sector’s epicenter thanks to favorable population growth trends and affordable living costs.


Even as the Federal Reserve considers its time frame for lowering interest rates, the pace of any cuts is unlikely to match the speed at which the central bank raised rates in 2022 and 2023. As a result, interest rates that are higher for longer could serve as both a tailwind and a headwind through different channels.

On the one hand, malaise in SFR CMBS markets should be expected, and cap rates may have more room to grow. On the other hand, mortgage rates may not return to pre-2023 levels in the near term. According to Fannie Mae, 30-year mortgage rates are forecast to average 6.1% and 5.6% in 2024 and 2025, respectively. With homeownership remaining prohibitively expensive for many would-be buyers, SFR is positioned to absorb a sizeable portion of housing demand. On balance, the SFR sector continues to demonstrate strength amid economic turmoil, attracting increased attention from the broader multifamily investment community.

1 Unless otherwise noted, the Chandan Economics data covering single-family rental cap rates and debt yields are based on model estimates and a sample pool of loans. Data are meant to represent conditions at the point of origination.

For more single-family rental research and insights, visit

Disclaimer All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

Affordable Housing Trends – Spring 2024

Affordable Housing

Trends Report

Spring 2024

About This Report

The Arbor Realty Trust Affordable Housing Trends Report, developed in partnership with Chandan Economics, offers a wide-ranging view into the complex, yet critically important affordable and workforce housing sectors.


This report series is a comprehensive primer to help industry stakeholders understand the major trends shaping the affordable housing market. It addresses the significant changes observed both in terms of policy decisions and market dynamics and describes opportunities for investment and financing in the space.


Focused primarily on affordable housing supported by government spending, subsidies, or tax incentives, including the Low-Income Housing Tax Credit (LIHTC), Housing Choice Vouchers (HCV), and Project-Based Section 8, these reports also cover the Naturally Occurring Affordable Housing (NOAH) segment and the utilization of rent control.

Key Takeaways

  • Approximately half of all rental households in the U.S. are now classified as moderately or severely cost-constrained.
  • Critical affordable housing programs received funding expansions in the recently passed FY 2024 federal spending package.
  • Up-zoning is being utilized more frequently to encourage affordable housing creation by allowing development in higher-density areas.

State of the Market

As the cost of homeownership climbs ever higher, the affordability crisis has become one of the nation’s most intractable issues. The number of renters that are either moderately or severely housing cost-constrained reached an all-time high of 22.5 million households in 2022, accounting for roughly half (49.8%) of all rentals (Chart 1)1, according to a Chandan Economics analysis of U.S. Census Bureau data. While the number of non-cost-burdened rental households has remained effectively flat (-0.05%) over the past five years, cost-burdened rentals have swelled by 10%.


The National Low Income Housing Coalition’s (NLIHC) March 2024 report The Gap notes that the shortage of affordable rental housing widened between 2019 and 2022, expanding by 480,000 units. The NLIHC estimated that the U.S. currently needs 7.3 million more affordable housing units to meet current demand.

As affordable housing advocates continued to pressure lawmakers, the federal government’s 2024 budget offered some welcomed news. It included an $8.3 billion increase in funding for the U.S. Department of Housing and Urban Development’s affordable housing programs. At the same time, state and local governments are utilizing policy initiatives, including tax credits for new construction and targeted amendments to zoning codes, to encourage development. With more funding on the way, policymakers and private market advocates are pressing ahead with plans to add units to an increasingly tight housing market.


The Low-Income Housing Tax Credit (LIHTC) program is the nation’s single-largest supply-side affordable housing resource. LIHTCs come in two forms: a 9% tax credit to incentivize new development and a 4% tax credit for rehabilitating and preserving existing properties. According to the National Housing Preservation Database, LIHTCs supported approximately 2.6 million rental units in 2023. In recent years, developer funding gaps have limited the use of the 9% LIHTC. Construction costs have soared while the 9% LIHTC tax credit, which developers can sell to finance their projects, has declined in value. Following the 2016 election, LIHTC equity prices dropped in value by about 10% as investors anticipated (and eventually received) a decrease in tax liabilities (Chart 2). Since 2021, 9% LIHTC equity prices have stabilized between $0.87 and $0.89 per credit, according to CohnReznick’s Housing Tax Credit Monitor.

Meanwhile, the rehabilitation tax credit became more appealing after the December 2020 passage of the Consolidated Appropriations Act established a minimum 4% floor on the applicable federal tax credit rate for tax-exempt multifamily housing private activity bonds (PABs). The minimum floor made the 4% tax credit more valuable and increased how much funding developers can raise to finance construction. As a result, the 4% LIHTC tax credit for rehabilitation became more attractive compared to the ground-up development 9% credit, leading to a greater share of rehabilitation activity. In 2023, the 4% credit accounted for 59.5% of newly HUD-insured LIHTC mortgages — a new high.


In 2023, the dollar volume of investor equity closed into housing tax credit funds reached another record high of $26.3 billion — an increase of 6.6% year-over-year, according to CohnReznick (Chart 3). In its Housing Tax Credit Monitor Report, CohnReznick notes that two factors were largely responsible for the volume increase: increased use of the 4% tax credit and the Community Reinvestment Act (CRA). Amended in October 2023, the CRA encourages banks to help meet the credit needs of low- and moderate-income neighborhoods.

Despite the federal LIHTC program’s overwhelming importance, LIHTC’s complexity and incremental funding expansions have made it more difficult for it to keep pace with the growing national need for new housing. However, progress has been moving faster at the state level. According to Novogradac, 29 states now have state-level LIHTC programs, more than double the amount just a decade ago, with 17 state-level programs introduced since 2013. This trend likely has staying power after Texas and Rhode Island both introduced LIHTC programs in the past year.

Project-Based Section 8

The Section 8 Project-Based Rental Assistance (PBRA) program is one of the largest affordable housing initiatives in the U.S., supporting an estimated 1.4 million rental units through 2023. It is open to low-income households earning at most 80% of their local area median income. Landlords participating in the PBRA program receive the fair market rent (FMR) for each occupied unit, as established by the local public housing agency. Tenants are responsible for paying up to 30% of their adjusted income toward rent and utilities or $25 — whichever is greater. The Federal PBRA subsidy will then cover the difference between the FMR and the tenant contribution.


For decades, this program has successfully attracted large numbers of private, for-profit owners. Between 1990 and 2023, the share of owners entering Section 8 PBRA that are profit-motivated has grown from 3.4% to 91.2% (Chart 4). The U.S. Department of Housing and Urban Development has also made a series of updates and rule changes in the past year that make the program more attractive to the private market and make it easier for owners to rehabilitate and re-capitalize their properties. In 2024, the PBRA is slated to receive a much-needed boost in federal support as HUD’s FY 2024 budget included a 7.4% increase above FY 2023 levels.

Housing Choice Vouchers (HCV)

LIHTC is the largest supply-side affordable housing program in the U.S., but the Housing Choice Voucher (HCV) program is the biggest overall and continues to grow. It accounted for nearly 2.8 million units or 53.7% of all federally subsidized rental units2, climbing 59 basis points (bps) from 2022 (Chart 5). The next largest program by unit count, Project-Based Section 8, is a distant second at 25.6%. (Note: LIHTCs are excluded from this analysis.)

The HCV program is primarily a form of tenant-based housing assistance in which renters spend 30% of their adjusted monthly income on rent, and the balance is covered through a subsidy — much like in the PBRA program. However, the HCV program allows tenants to move to a new location and maintain their voucher, which promotes housing mobility and greater access to economic opportunities. In 2023, the average household income for renters in this program was $17,835. Both major political parties and the private market broadly support the HCV program.


Unlike rent control, which places the subsidy burden on the landlord, HCVs interact openly in a market setting. The program gives households the option to retain their subsidy should they move, encouraging positive housing mobility. However, the HCV program has been slow to expand in recent years, failing to keep pace with the growing needs of low-income renters. Between 2019 and 2022, the program grew an average of 1.8% annually (Chart 6). The pace of its increase slowed to 1.3% in 2023, as federal government operations were funded through a series of short-term spending bills. But with more support from the federal government promised, next year’s projections are brighter. Funding for the HCV program is set to expand by nearly 7% (or $2.1 billion) in 2024.   

In October 2023, HUD announced that it was expanding its Small Area Fair Market Rents (SAFMR) rule to an additional 41 metropolitan areas. Under the SAFMR rule, the maximum rent covered by the voucher is determined by rent prices within local zip codes — rather than at the metro level. The updated policy allows the voucher program to track local market conditions more closely, improving their usability and utility. By extension, tenants can more easily use vouchers to access higher-rent neighborhoods with better-performing schools and improved economic opportunities.


Zoning law reform has emerged as a favored policy tool among both tenant and industry advocates searching for a solution to the ongoing housing supply shortage. Recently, NPR called up-zoning the “hottest trend in U.S. cities,” with roughly 20 municipal-level reforms being considered nationwide as of April 2024.


Up-zoning allows an increase in the density of housing units in a given area. Experts consider it to be a way to lift the artificial cap on the amount of housing that can exist in a local area. The idea behind up-zoning is that allowing more new construction and improving the supply of rental units will decrease competition for housing and slow rent growth.


In recent years, states such as California, Vermont, and Montana, alongside numerous localities, have implemented generational changes to zoning laws. According to the University of California, Berkeley’s zoning reform tracker, Washington has had the most up-zoning reforms since 2007, with 15 adopted or ongoing. California follows closely behind, with 14 adopted or ongoing up-zoning reforms, while North Carolina, Minnesota, and Michigan round out the top five.


Although the Federal government doesn’t hold jurisdiction over zoning, Congress funded a new grant program in its 2023 budget through the Department of Housing and Urban Development (HUD) called the “Yes In My Back Yard” initiative. It aims to incentivize states and localities to reform their zoning laws. The program’s initial $85 million in funding was raised to $100 million in the recently passed FY 2024 budget as part of HUD’s Community Development Block Grant (CDBG) program.

Naturally Occurring and Workforce Housing

While public attention often centers on regulation and policy, naturally occurring affordable housing (NOAH) makes up a much greater share of the total affordable supply. According to an analysis of Freddie Mac lending data and other estimates, NOAH outnumbers regulatory-supported units by a factor of four. In 2023, NOAH properties accounted for nearly 75% of multifamily originations of units affordable at 80% or below the local area median income (AMI) (Chart 7)3.

In 2024, Fannie Mae and Freddie Mac each have a $70 billion multifamily lending cap — down from $75 billion in 2023. However, the FHFA is maintaining its direction that at least 50% of the agencies’ loan volume needs to be mission-driven lending, such as supporting the creation and preservation of affordable housing. Loans classified as supporting workforce housing properties are exempt from the volume caps, which should generate more liquidity within the workforce housing segment.


Nationally, workforce housing, which is often called the ‘missing middle,’ is starting to attract the policy attention it deserves. In December 2023, the Workforce Housing Tax Credit Act was introduced to both chambers of Congress. If passed, the bill would establish a middle-income housing tax credit (MIHTC), which is modeled after the success of the LIHTC program, to help finance the construction of an estimated 344,000 rental units. In addition to the bill receiving support from both Republicans and Democrats, the National Multifamily Housing Council and the National Apartment Association have also endorsed the proposed legislation.

Rent Control

Over the past few years, rent control has reemerged as a political issue. Cities like San Francisco, San Diego, and Washington, D.C., have imposed new restrictions on landlords in recent years, while new state-wide regulations in Washington could potentially follow those already in place in Oregon and California. But, rent control continues to be a contentious topic of discussion.
The long-standing position of housing market economists remains that rent control tends to adversely impact the same renters the policy intends to help.


A recent NMHC Report, Rent Regulation Policy in the United States, explores how, in the long run, rent control policies reduce the number of housing units in a market, exacerbating affordability issues. Rent control regulations can also negatively impact land values, reducing local communities’ tax revenues. A 2024 review of rent regulations by the Federal Reserve of St. Louis found that following rent control implementation, rental stock typically declines as landlords and developers pivot towards owner-occupied properties, undermining potential benefits to tenants.


At the Federal level, the rent control debate remains intense, especially concerning LIHTC. Earlier this year, HUD announced an update to its formula for the maximum allowable rental increase for units in properties receiving LIHTCs. Under the new methodology, the maximum annual rent increase is lowered to 10% — down from 14.7% using the previous methodology. Novogradac estimates that the share of units that the rent cap will impact will rise from 10% to 30%. Industry groups broadly oppose the rule change. Mortgage Bankers Association noted that the updated rent cap policy severely suppresses the LIHTC program and “contradicts many of the Administration’s other efforts to increase affordable rental housing.”

What to Watch

Looking ahead, increasing the affordable housing supply will continue to require an all-hands-on-deck approach. The bi-partisan Tax Relief for American Families and Workers Act of 2024 passed the House with overwhelming support earlier this year, although its fate remains uncertain in the Senate. If passed, the bill would restore higher allocation increases for LIHTC, which could lead to the creation of an additional 200,000 affordable rental units.


The path forward may differ depending on which major political party controls the White House and Congress in 2025. The Biden-Harris Administration’s proposed FY 2025 budget calls for meaningful expansions of key policy programs, including HCV, LIHTC, and PBRA. Meanwhile, the Republican Study Committee recently released its FY 2025 Budget Proposal, which calls for combining and re-purposing current Federal subsidies for programs such as LIHTC and PBRA into increased funding for Housing Choice Vouchers.


Although housing affordability is a national concern, state and local lawmakers continue demonstrating their worth in easing the crisis. As myriad solutions aimed at expanding supply begin building upon one another, fundamental change will be next to follow.

Terms and Definitions

Sources: U.S. Department of Housing and Urban Development; Tax Policy Center; Chandan Economics

For more affordable housing research and insights, visit

1 Housing cost burden measured as gross rents, including contract rents and utilities. For this analysis, households with no recorded gross rent are considered non-cost-burdened and households with positive gross rents and negative or no incomes are considered severely cost-burdened.

2 The total is based on data retrieved from HUD’s Office of Policy Development and Research as of the end of 2023.

3 According to a Chandan Economics analysis of Freddie Mac K-Deals.


All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

Top Markets for Large Multifamily investment Report 2023


In 2023, investors need a sharp eye to pinpoint the top multifamily real estate opportunities. With elevated interest rates and volatility becoming the new normal, the risk vs. opportunity assessments of individual markets have shifted as domestic migration and insurance market corrections have changed the calculus.

The Arbor Realty Trust-Chandan Economics Large Multifamily Opportunity Matrix analyzed the top 50 U.S. metros for real estate investment to identify those markets most prime for apartment sector growth in 2023. Rising to the top this year were Orlando, Austin, and Charlotte, three attractive Sun Belt markets ripe with opportunity.


This report presents an analytical framework to develop a cross-market comparison for opportunistic multifamily investments. For the purposes of this analysis, “large multifamily” is considered to be assets containing 50 or more units with a combined valuation exceeding $20 million.

The top 50 U.S. metros1 are ranked using the Arbor-Chandan Large Multifamily Opportunity Matrix based on a weighted average of performance metrics. The Opportunity Matrix pays specific attention to how well metro-level economies have maintained strength over the past year and how they are positioned to handle shifting market conditions in 2024 and beyond.


1 The top 50 metros are based on population estimates. All metros are reported at the Metropolitan Statical Area (MSA) level.

Key Findings

  • Orlando is 2023’s most desirable metropolitan market for large multifamily investment due to its robust population growth, a rapidly growing financial services sector, and low risk of natural hazards.
  • The biggest cities in the U.S., including New York, Los Angeles, San Francisco, and Chicago, have become less attractive to multifamily investors as these metros become less affordable and more renters move elsewhere.
  • Austin ranked second out of 50 as it continues attracting new residents and has the highest percentage of renters under 35 of all metros on the list.

PDF link below

The Opportunity Matrix

The Opportunity Matrix measures eight key categories, each described in more detail on the next section.

  1. Large Multifamily Investment: measured as a proxy for debt financing availability, overall liquidity, and a market’s ability to support additional multifamily investment. Multifamily loans (both acquisitions and refinancings) with original balances above $15 million are included for analysis.
  2. Labor Market: topline profile of key labor market performance indicators, including market size and growth, unemployment rate, change in the unemployment rate over the past year, and wage growth.
  3. Population Growth: overall growth of a metro over the short and medium term.
  4. Renter Demographics: spending power and age profile of existing renters (higher household incomes and younger renters assumed as conducive for higher levels of multifamily demand).
  5. Renter Vacancy: measures the current market tightness for all existing
    metro-level rental inventory.
  6. Supply and Demand Equilibrium: compares aggregate population increases to the volume of new multifamily permitting activity as a proxy for market tightness and ability to absorb new, large-scale multifamily supply.
  7. Affordability: minimum income needed to rent an apartment without
    being rent-burdened, included to capture a market’s attractiveness for
    incoming rental demand.
  8. Climate Risk: measures both risk and readiness, included to account
    for the increasing frequency of natural hazards and the evolving property insurance landscape.

The Opportunity Matrix includes factors a multifamily investor might consider in their market selection process. All eight categories have received equal weighting. In categories with more than one variable, each variable received equal weighting.

Top Ranked Markets

Orlando is 2023’s top ranked market due to its well-rounded fundamentals and impressive labor market performance over the past year (Chart 1). A premier travel destination, this central Florida city performed better than the average metro in a majority of the variables measured in the matrix. For instance, Orlando’s population inflows were impressive. In 2022, the Orlando metropolitan area saw its resident population swell by 2.4% — the second-highest mark in the country. Due in part to its inland location (42 miles from the ocean), Orlando has not only the lowest climate risk score in Florida but one of the lowest in the country.

For a full breakout of the 2023 scores and rankings, see Table 3 in the Appendix at the end of the report.

Now, with the introduction of Brightline, a privately operated high-speed train line, Orlando and Miami are enjoying the benefits of integrating two thriving economies.

Austin, the home of many large tech companies, claims the No. 2 spot in this year’s rankings. With the rental vacancy rate in Austin sitting at 7.3%
(1.6 percentage points above the top 50 median) and rents falling 1.8% year-over-year through July, the capital of Texas is going through a transition phase as it absorbs a deluge of new housing supply. Still, signs of a turnaround are already underway, and Austin’s demand drivers are too strong to ignore. Austin’s 2022 population growth rate reached 2.7%, which was 0.3 percentage points higher than any of the other 50 metros. Further, 50.8% of Austin’s renters are below 35 years of age, leading all other markets.

After ranking 10th in 2022, Charlotte has shot up the board to round out this year’s top 3. North Carolina’s largest city, where households can comfortably rent an apartment with an income of about $75,000, remains more affordable than the top 50 market average of $78,557.
Charlotte features major-city urban amenities in an affordable environment, making it a popular destination for young relocating renters. Charlotte’s population growth rate reached 1.8% in 2022 — the eighth-highest pace of the top 50 metros in the Opportunity Matrix. This southern commercial hub, which has the fifth-highest average rental household income ($95,007), also contains a strong base of higher-income renters.

Large Multifamily Investment

Large multifamily investment across U.S. markets has been anything but uniform. Here, we analyze a pool of loans across the top 50 metros with originations between July 2021 and June 2022 and original balances above $15 million. Lending volumes include loans originated for both investment sales and refinancings. These data are leveraged as a proxy to determine which markets have the most liquidity to support large multifamily investments. Leading the way were Dallas, New York, and Los Angeles, which accounted for 7.1%, 6.9%, and 6.8% of the observed sample, respectively (Chart 2).

Supply and Demand Equilibrium

To analyze the supply and demand equilibrium, we compared metropolitan markets’ 2022 population inflows to the volume of residential permitting activity from July 1, 2022, to June 30, 2023, to determine market tightness and the demand for new housing. For example, a market that is gaining new residents faster than adding new housing supply would theoretically exert upward pressure on pricing.

Applying this logic on the reverse side of the spectrum, markets with population outflows or high levels of new residential construction relative to incoming housing demand could expect softening prices. Tampa, No. 14 on the Opportunity Matrix, ranked first in the supply and demand equilibrium category (Chart 3). Tampa’s population increased by 61,653 people in 2022, while 25,854 housing permits were tracked from the third quarter of 2022 to the second quarter of 2023.

Other top performers in this category were Dallas, San Antonio, Oklahoma City, and Orlando. New York (41st), Los Angeles (46th), and Chicago (50th) — the country’s three largest cities — all rank in the bottom 10 in this category as a result of sizable population outflows in 2022.

Rental Affordability

One of 2023’s most compelling topics, housing affordability, factored heavily in the 2023 Opportunity Matrix. According to an analysis of the U.S. Census Bureau’s 2022 Current Population Survey, a desire for cheaper housing, better/new housing, a more desirable neighborhood, or another housing-centric reason motivated 35.6% of renter-moving decisions last year. Due in part to the adoption of remote work, Americans are less constrained by location than they were pre-pandemic, giving them greater flexibility in their housing choices. As a result, migration has begun accelerating to affordable metros. According to a recent analysis by Freddie Mac, “the pandemic amplified existing urban de-concentration by threefold, from large, expensive metro areas to smaller, more affordable destinations.”

To measure housing affordability in the Opportunity Matrix, we reviewed data from Waller, Weeks, and Johnson Rental Index — a collaborative research series produced by teams at Florida Atlantic University, Florida Gulf Coast University, and the University of Alabama, who calculate the minimum income required in each metro for households not to be considered rent-constrained. Those metros with lower income thresholds for affordability were then rewarded in our matrix since they are more attractive to renters in search of low-cost, high-quality housing options.

Milwaukee leads the country in terms of rental affordability in 2023. With an average monthly rental price of $1,344 through July 2023, households earning $53,760 or more are not considered rent-burdened in Wisconsin’s largest city. Just behind Milwaukee is St. Louis, another powerhouse city in the Midwest, where the rent-burdened threshold is $53,880. Rounding out the top 5 in this category are Buffalo ($54,440), Louisville ($54,640), and Oklahoma City ($54,960). Meanwhile, the threshold is more than twice as high in the coastal cities of New York ($137,800), San Jose ($137,000), and San Diego ($128,200).

Climate Risk and Readiness

A topical inclusion to this year’s opportunity matrix is climate risk and climate risk preparedness. According to a recent analysis by Redfin, migration into disaster-prone areas has accelerated in recent years. With incidences of major storms, extreme heat, and wildfires all on the rise, property owners now need to incorporate the risks into their investment decisions. Moreover, the risk to rental operators extends beyond direct damage from a climate event. Property insurance prices have skyrocketed in coastal markets in Florida, while some major coverage providers have pulled out of California due to wildfire risks. As insurance markets recalibrate to shifting climate risks, rental property owners may face a combination of rising costs and growing risk exposure.

To assess climate risk, we utilized the Federal Emergency Management Agency’s (FEMA) National Risk Index for Natural Hazards (NRI). FEMA describes the NRI as a “tool that shows which communities are most at risk to natural hazards. It includes data about the expected annual losses to individual natural hazards, social vulnerability, and community resilience.” Within our opportunity matrix, we included two composite indices tracked by the FEMA NRI: overall risk and overall readiness.

On the risk front, Miami is the most hazard-prone metro among the top 50, driven primarily by exposure to hurricanes and flooding. Following behind Miami are Chicago, Los Angeles, and Hartford. On the positive end of the spectrum are Oklahoma City, Orlando, and Charlotte — all of which are set away from the coast by at least 40 miles. When it comes to natural hazard readiness, Seattle, Minneapolis, and Raleigh receive the highest ratings among the top 50, while Riverside, Sacramento, and Providence are the least prepared metros for natural hazards.

Market Spotlight: Orlando

Does Orlando have a touch of magic — or just a strong set of economic fundamentals? Perhaps it’s a bit of both.

Driving Orlando up to the top spot in the 2023 Opportunity Matrix is a labor market continuing to grow at an impressive clip, which is, in turn, attracting new residents to Central Florida’s economic epicenter. Through July 2023, Orlando had an unemployment rate of just 2.8% while the number of jobs in the metro is up by 2.9% from the same time last year — the 6th highest mark of all 50 metros. With Orlando businesses hiring and local labor in short supply, firms have been bidding against each other for talent, leading to significant wage growth.

The largest industry in town is, of course, tourism. Orlando is America’s number one travel destination, welcoming 74 million visitors in 2022. Leisure and hospitality jobs have grown by 7.5% year-over-year and account for 20.2% of Orlando’s employment, making it the metro’s dominant sector. While tourism provides a comfortable bedrock of support, Orlando’s accelerating diversification is spurring optimism. Notably, Orlando’s financial sector has gained significant momentum since the start of the pandemic as more firms and households relocate to the area. Through July 2023, the financial services sector has swelled by 14.2% above its pre-pandemic peak.

Placing Orlando on an encouraging growth track is the Brightline — the country’s first high-speed private railway, which began service in September 2023. The Brightline runs from Orlando to Miami and completes its journey in about 3.5 hours — 30 minutes less than the average drive time. Fortress Investment Group, Brightline’s owner, estimates that ridership will stabilize at eight million people annually. This new interconnectivity of Central Florida with the state’s southeast corridor is expected to pump an additional $6.4 billion into Florida’s gross domestic product over the next eight years, Brightline has projected.

It appears that word of Orlando’s economic prowess has become universal, with the population growth rate for the metro reaching 2.4% in 2022 — more than six times higher than the national average. Looking ahead, there are credible reasons to believe that Orlando will maintain the wind in its sails. The Orlando City Government anticipates that the urban population will grow another 46% by 2050. However, the changing dynamics of climate risk may contribute to an even larger population increase. Due to its low natural hazard/climate risk and close proximity to high-risk cities, Orlando is strategically positioned to attract migrating households and businesses.

The present success of the Orlando economy and favorable outlook for its future are strengthening rental housing’s fundamentals. According to data from the U.S. Census Bureau, Orlando’s rental vacancy rate averaged 4.5% in the first quarter of 2023 — placing it 11th among our top 50. Further, it has surpassed all other Florida markets in terms of multifamily sales activity in the past year, according to CoStar, making it ripe for investment into 2024.


In 2023, multifamily investors are in uncharted waters. Cap rates have risen and transaction volumes have slumped, a reflection of a challenging interest rate environment. But at the same time, property-level operations have held up remarkably well, and high mortgage costs have strengthened demand for multifamily properties. All else being equal, the U.S. multifamily market is balanced by a favorable combination of headwinds and tailwinds that are likely to remain into 2024.

Looking ahead, natural hazards (and their impact on insurance markets) are beginning to have more influence on the risk/opportunity calculus of multifamily investors. Concurrently, conventional considerations of local economic success and their ability to attract new residents are as relevant as ever, especially with the U.S. population growth rate continuing to sink lower.

On a metro-by-metro basis, competition for residents is poised to escalate in the years ahead, creating new opportunities for large multifamily investment in metropolitan areas.


About Us
Arbor Realty Trust, Inc. (NYSE: ABR) is a nationwide real estate investment trust and direct lender, providing loan origination and servicing for multifamily, single-family rental (SFR) portfolios, and other diverse commercial real estate assets. Headquartered in Uniondale, New York, Arbor manages a multibillion-dollar servicing portfolio, specializing in government-sponsored enterprise products. Arbor is a leading Fannie Mae DUS® lender, Freddie Mac Optigo® Seller/Servicer, and an approved FHA Multifamily Accelerated Processing (MAP) lender. Arbor’s product platform also includes bridge, CMBS, mezzanine, and preferred equity loans. Arbor is rated by Standard and Poor’s and Fitch. In June 2023, Arbor was added to the S&P SmallCap 600® index. Arbor is committed to building on its reputation for service, quality, and customized solutions with an unparalleled dedication to providing our clients excellence over the entire life of a loan.

All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

Special Report: Fall 2023

Recalibrating Amid Uncertainty

Key Findings

  • Despite a slowdown in new investment, the macro economy has outperformed expectations in 2023, indicating a soft landing is more likely.
  • A yield curve normalization could place additional upward pressure on long-term interest rates and cap rates into 2024.
  • While local challenges in select rental markets are meaningful, the multifamily sector remains structurally sound and well-positioned to limit distress on a national level.

Ivan Kaufman is the Founder, Chairman and CEO of Arbor Realty Trust, Inc. (NYSE:ABR), a leading multifamily and commercial real estate lender and real estate investment trust. Arbor manages and services a $42 billion real estate loan portfolio and has originated more than $20 billion in loans since 2021. Arbor is recognized as a top lender by Fannie Mae and Freddie Mac. Ivan is also the co-founder of Arbor Multifamily Acquisition Company (AMAC), an investment firm created in 2012, which owns and operates over 12,000 units and has acquired more than $2.5 billion of multifamily properties across the country. Through his successful development and evolution of many companies that span nearly four decades through all cycles, Ivan Kaufman is a trusted thought leader and pioneer in all aspects of commercial real estate finance.

Sam Chandan is a professor of finance and Director of the Chen Institute for Global Real Estate Finance at the NYU Stern School of Business. He joined the Stern faculty in late January 2022. From 2016 through early January 2022, he was the Larry & Klara Silverstein Chair and academic dean of the Schack Institute of Real Estate at the NYU School of Professional Studies, one of the world’s largest centers of real estate education. He is also the founder of Chandan Economics, an economic advisory and data science firm serving the institutional real estate industry, a contributor to Forbes, and host of the Urban Lab on Apple Podcasts. Dr. Chandan is chair of the Real Estate Pride Council, a global association of lesbian, gay, bisexual, and transgender leaders in the professions of the built environment. Dr. Chandan is a Fellow of the Royal Institution of Chartered Surveyors (FRICS), the Royal Society for Public Health (FRSPH), and the Real Estate Research Institute (RERI), and an Associate Member of the American Society for Microbiology (ASM). His multifaceted research interests address real estate as well as urban epidemiology and the preparedness of global cities and other systemically important urban areas in managing novel public health threats.

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The Outlook

In early 2023, as the Federal Reserve began its monetary tightening cycle, the central bank insisted that an economic downturn was not a foregone conclusion, although history indicated otherwise. Over the next few quarters, turbulence is foreseeable as multifamily investors navigate the bottom of this cycle and recalibrate their expectations.

The nation’s economic environment remains challenged. The failures of two large regional banks and high interest rates have added fuel to pre-existing economic anxiety. In the thick of this dislocation, the financial markets continue to see significant volatility, and expectations are that the next two to three quarters will be the most challenging part of the cycle. Nevertheless, national economic growth has proven resilient as the labor market has displayed strength and shed excess momentum, moving the economy closer to a soft landing.

Seatbelts Fastened

Deservedly, there is more optimism in the U.S. economic outlook now than there was six months ago, but we are far from being out of the woods. Generally, periods of economic instability will last 18 to 24 months. Given that the market is about 15 months into the current cycle, there could be six to nine months left. However, it does appear the market has reached the bottom.

While some observers project the Federal Reserve will begin cutting rates by mid-2024, the speed at which the central bank rolls back its rate hikes is unlikely to match its historically rapid pace of tightening. Investors anticipate that the federal funds rate will fall by only 100 bps from its current rate of 5.3% between now and the end of 2024 (Chart 1), which is consistent with the Fed’s internal projections.

Even if the Federal Reserve begins cutting short-term interest rates, there remains a high likelihood that long-term interest rates will experience upward pressure over the next year. Generally, investors require a premium to hold long-term investments instead of short-term investments, resulting in a positive yield curve, which is the norm. Inverted yield curves are abnormal red flags that have historically signaled recessions. If we see a return to an upward-sloping yield curve, it is likely to result in higher rates on 10-year Treasurys and all other long-dated market securities.

Nevertheless, the forecast has improved even as clouds remain on the radar. In the span of 12 months, inflation has fallen from 9% to 3% and is likely to fall more in the coming months. A major contributing factor to inflation staying above target is shelter costs, which, according to research presented by the Federal Reserve Bank of San Francisco, should ease substantially in the months ahead.

The ongoing strength of the labor market is also fueling optimism among the investment community. Job openings have dropped by more than 20% from their 2022 highs, and monthly job gains have repeatedly beat economists’ expectations. At the same time, unemployment remains near historic lows, and the share of prime-age workers in the labor force is higher than at any point since the 2008 financial crisis. As we look ahead to 2024, the resilient economy appears to be on the path to a soft landing.

Commercial Reality

With macroeconomic conditions at a potential cyclical bottom, the rental housing sector finds itself balanced between an unforgiving interest rate climate and operational stability.

An ongoing complication for commercial real estate is competitively obsolete office space. The pandemic upended fundamental assumptions about how we work, and the built environment is just starting to catch up.

Interest in office-to-multifamily conversions reached a fever pitch in the early days of the pandemic. However, while stories of conversions have now reached front-page news, they represent the exception — not the rule. From the perspectives of structure, location, and capital markets, most impaired office assets do not lend themselves to multifamily conversion. Among the risk factors multifamily investors should keep an eye on, the prospect of a meaningful influx of converted office assets is one where the headlines outweigh the hazards.

The most notable risk presented by troubled office assets is their impact on capital markets. Even as the operational profile of the rental housing sector is in good health, traditional lenders, especially banks, have broad exposure across all commercial property types. Subsequently, even if multifamily loans are not a meaningful source of distress, bank lenders are progressing cautiously across all property types (Chart 2).

Beyond spillover impacts from the office sector, the most pressing concern for investors is the short- and long-term impacts of elevated interest rates. As discussed above, yield curve inversions are departures from normalcy. Since 1962, short-term interest rates have sat higher than long-term rates about 22% of the time, with the average sustained inversion lasting for 46 weeks (Chart 3).1   Through early September 2023, the current inversion has lasted 43 weeks. History and financial principles suggest that a yield curve normalization should be our baseline expectation. If a yield curve normalization does occur in the coming months, the consequence for multifamily would be additional upward pressure on the cost of capital and cap rates.

While rising cap rates can contribute to lower valuations, rental housing is well-positioned to absorb downside pressures and return to growth once there is a normalized interest rate environment and regular transaction volume. In the aftermath of the 2008 financial crisis, multifamily assets saw the least severe price declines and the quickest return to pre-crisis valuations compared to all other property types (Chart 4).

Historically, the multifamily sector has shown stability in times of adversity. Now, with default distress remaining limited so far, rent collections holding up, and Fannie Mae and Freddie Mac backstopping liquidity, the apartment sector is seemingly in a structurally sound position. It is expected that some properties across the country will experience an increase in delinquencies as a result of this point in the cycle. However, well-positioned operators and investors are likely to manage effectively.

While the overall long-term outlook for the rental market is decidedly positive, a wide variety of local risk factors contribute to an uneven recovery timeline across local markets.

For instance, New York, Chicago, San Francisco, and other major metropolitan cities are grappling with significant fiscal issues as impending budgetary shortfalls raise questions about financial priorities. In the Sunbelt, rising premiums or disappearing coverage for property insurance in select California and Florida markets have ignited debates over risk, resilience, and livability. Many of the growth markets that attracted large volumes of domestic migration during the pandemic and its immediate aftermath are now inundated with new construction as population flows have calmed (Chart 5).

Lastly, as rent growth has reached record highs in recent years, rent control initiatives have been introduced and implemented by some state and local legislatures. Additionally, economic vacancy (also known as rent loss, which is calculated by the difference between potential rent and collected rent) has played a role in many markets. The ability to remove non-paying tenants or collect rent from them has been an increasing issue.

Although pockets of concern are easily identifiable, rental housing remains supported by significant tailwinds that are unique compared to other commercial real estate property types. Despite mortgage rates more than doubling, we have not seen a commensurate drop in home prices. For aspirational households, homeownership appears as unaffordable today as ever, reinforcing the need for more single-family rental and multifamily construction.

Moreover, even as incoming inventory will present some near-term absorption and pricing headaches, Fannie Mae economist Tim Komosa notes that “it’s possible that future demand may be able to keep pace with this new supply,” citing that “there is still an ongoing shortage of housing, particularly affordable, in many places across the country.” Even with these challenges taken into account, the rental market maintains a foundation of stability to withstand economic volatility.

The Road Ahead

A narrow avoidance of a recession is quickly becoming the baseline expectation and the outlook for interest rates appears to be more favorable than it was six to nine months ago. However, if 2023 has taught us anything, it’s that a soft landing may not be the most apt description for what we are experiencing. Instead, this year has been more like flying through turbulence and the next two quarters are expected to be the worst of this cycle.

Even as the economy has sustained its growth, recent successes are not guaranteed to continue. Risk factors beyond our borders — whether it be a widening of the war in Ukraine, financial contagion from concerns over China’s macroeconomic stability, or another black swan event — are capable of undermining domestic growth. Closer to home, debt ceiling fights in the halls of Congress have occurred with increasing regularity, eroding the U.S. government’s creditworthiness.

Nevertheless, the U.S. economy deserves credit for its resilience. The U.S. has outperformed most other advanced economies in terms of reining in inflation and limiting the shortfall of potential GDP — justifying confidence in its ability to continue the course. Growth in the face of headwinds should also breed confidence in the rental housing sector. Despite record levels of new supply, 96 of the top 100 markets continue to achieve year-over-year rent gains. Moreover, even as cap rates are forecasted to rise into 2024, so too are net operating incomes, which should limit the severity of price declines.

As portfolios are re-adjusted and economic vacancy is addressed, investors are now able to dedicate more time and attention to focusing on managing their assets. Looking forward, rental housing, across all sub-product types, is well-equipped to handle the impact of any volatility ahead, whether the landing we experience is soft, hard, or somewhere in between.

1 Yield curve inversions described in Chart 3 are periods where the effective federal funds rate is higher than the 10-year Treasury yield. Sustained inversions are counted as the total of the number of weeks where the FFR averaged higher yields than the 10-year Treasury. Streaks interrupted by more than three (3) weeks of non-inversion are treated as separate inverted periods.

About Arbor
Arbor Realty Trust, Inc. (NYSE: ABR) is a nationwide real estate investment trust and direct lender, providing loan origination and servicing for multifamily, single-family rental (SFR) portfolios, and other diverse commercial real estate assets. Headquartered in Uniondale, New York, Arbor manages a multibillion-dollar servicing portfolio, specializing in government-sponsored enterprise products. Arbor is a leading Fannie Mae DUS® lender, Freddie Mac Optigo® Seller/Servicer, and an approved FHA Multifamily Accelerated Processing (MAP) lender. Arbor’s product platform also includes bridge, CMBS, mezzanine, and preferred equity loans. Arbor is rated by Standard and Poor’s and Fitch. In June 2023, Arbor was added to the S&P SmallCap 600® index. Arbor is committed to building on its reputation for service, quality, and customized solutions with an unparalleled dedication to providing our clients excellence over the entire life of a loan.

For more research and insights, visit

Disclaimer All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.