Economic Projections For the Second Half of 2023 and Its Impact on Multifamily

In the face of rising interest rates and economic uncertainty, commercial real estate investments have seen both wins and losses in the first half of 2023.

Multifamily, industrial, and local retail assets have delivered stable performances.

However office space continues to struggle due to falling demand and a sharp increase in vacancies, which averaged 16.1% at the end of the first quarter of 2023.

The rise in remote and hybrid models for workers has reduced demand for office space. It is creating challenges for that segment of commercial real estate, particularly across B and C-class buildings.

Federal Reserve and Interest Rates

Regardless of the industry segment, commercial real estate will continue to face volatility if the Federal Reserve restarts its campaign to raise interest rates throughout the second half of 2023.

While they left the door open for future increases at the July meeting, the expectation is that the Fed will only increase interest one more time in 2023, which should stabilize rates and help most commercial real estate asset classes.


The other side of the interest rate coin is inflation, which has stubbornly persisted despite 11 rate increases in 17 months. Market volatility and inflation will be prominent factors influencing commercial real estate performance for the remainder of the year.

Multifamily Performance

Despite rising rates and economic volatility, demand remains strong for multifamily.

Vacancy rates remain historically low and continues to fall despite new properties coming online. April reports show median vacancy rates fell to 3.9%, down from 4.5% at the end of 2022.

In the first quarter, rents climbed an average of 6%, with year-over-year. Rent increases are slowing but maintaining positive gains in most major metro areas.

Despite the positive gains across most markets, a handful of metro areas are seeing negative growth, including major markets like Las Vegas, Phoenix, and Seattle. However, most regions report steady performance, alleviating fears of a market crash.

The most significant decline in multifamily is investment volume, which tumbled by 70.6% between 2022 and 2023, falling to their lowest point since 2014.

Multifamily Trends the Remainder of 2023

Performance in the second half of 2023 will largely depend on whether or not we enter a recession. Economists have largely pushed recession expectations into 2024 or beyond. If that remains true, the multifamily market should continue to deliver stable results for the remainder of the year.

While slowed rent rate growth pales in comparison to 2021 and 2022 gains, they resemble pre-pandemic averages and a return to normal profits for investors.

Overall we expect the multifamily market to remain resilient for the remainder of 2023. As always, certain markets will outperform national averages, whereas others underperform.

In challenging times, when all markets are not rising with the tide, partnering with an experienced team who knows how to vet and acquire multifamily units in growing markets is essential for profitability.

At McKee Capital Group, we are sensitive to economic changes and follow the market closely to ensure we are prepared to capitalize on low-risk opportunities as they become available.

If you are interested in learning more about how we locate and vet cash-flowing deals despite the economic challenges seen in 2023, watch our introductory video.

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