— By Rawley Nielsen, President of Investment Sales, Colliers —
Salt Lake City’s multifamily market will continue to stand out and impress in 2023…even with so much uncertainty, ongoing readjustments within the market and many investors at a stay. That’s because Utah continues to receive outsized investor interest that will maintain stability in pricing. Investors recognize overall performance at property levels remains healthy as the state continues to be a leader in population growth. Utah is also one of the top states for outstanding job creation, increased demand for housing and exponential rent growth.
While multifamily investment sales volume was record-setting during the first half of 2022, we have seen volume taper dramatically in recent months. This is due to rising interest rates and a lack of clarity in the debt and equity markets that have impacted pricing. Much of this slowing can be attributed to the rising cost of capital and low leverage caused by debt service coverage ratio (DSCR) requirements. (See Tables 1-3)
Overall, 2022 saw an average cap rate of 3.75 percent, decompressing over 20 basis points compared to the first half of the year. Cap rates are expected to expand further through 2023 as uncertainty in capital markets persists.
Utah’s need for housing also remains strong. The state’s population has doubled in the past 30 years and is forecasted to double again by 2050. Maintaining new development will remain crucial as cities and developers feel the pressure to continue building to meet demand despite rising construction costs.
All eyes will be on the construction pipeline for the foreseeable future as developers grapple with the state’s long-standing housing shortage. Despite new supply coming online, Salt Lake County demand remains high and should stay strong. Salt Lake City is transforming with developments that will reshape the skyline. This is especially true in the residential rental market (see Table 4) as the cost to own a home has increased significantly.
The cost of owning a home in the U.S. is 31 percent higher than renting, according to a recent study by the John Burns Real Estate Consulting firm. The increase in monthly costs to own a home have had a significant impact on those looking to buy a home, causing many renters to postpone their home searches. Despite high rent growth, renting remains the more affordable option in the Utah market. (See Table 5)
All facets of the real estate cycle require different types of offense and defense when it comes to managing investments in multifamily, and Utah remains a safe wager to preserve capital and provide opportunity. In fact, Yardi Matrix recently ranked Salt Lake City as the second lowest risk market in the nation.
Looking ahead into 2023, we will see continued stabilization of transaction volume and a subsequent increase that will signal prices have found a bottom. They should then begin to rise as volume continues to rebound. We are watching closely for improved debt markets, the Federal Reserve’s signal that inflation is under control and rate increases have ceased. From there, we expect to see an influx of buyer activity that has been sitting on the sidelines. It is always best to focus on investments where fundamentals depict a bright outlook, and Utah will continue to shine bright.