URBAN PACE 2023 OUTLOOK: MARKET CONDITIONS

2022 is behind us. It was a difficult, challenging year, but not one that left us without valuable lessons learned or depleted of opportunity and optimism for the year ahead. Read on to see what we can expect from 2023.

Mortgage Rate Increases Will Slow

Given the number of variables that factor into the Fed’s rate increases, predicting future rate changes is difficult, but the most recent rate hike was the smallest adjustment since March and inflation has eased meaningfully. Experts are generally in agreement that mortgage rates are past their peak. Goldman Sachs projects that the 30-year fixed rate will end 2023 at 6.5%, Freddie Mac forecasts it to end at 6.2%, and the Mortgage Bankers Association expects to see it at 5.2%. Continued signs of inflation stability and economic recovery could lead to a quick decline in rates and increased sales activity.

Inventory Will Remain Low

While more consistent mortgage rates will instill more consumer confidence, the increased monthly cost to own will still dissuade many owners from changing homes. This will keep significant inventory off the market and maintain upward pressure on pricing even as affordability may have eroded for many buyers. The pandemic and its accompanying effects interrupted the condo pipeline in 2020 and 2021. Disruptions to the supply chain, increased construction costs, and pervasive economic uncertainty killed or delayed numerous developments. Several condo projects that started selling during the first year of the pandemic converted to rentals when slow presales and climbing costs changed the math on profitability.

Low inventory may help the condo market correct, as it will keep pricing high and increase absorption for standing inventory. There are relatively few options for buyers to choose from, even with less buyers on the market.

Modest Return To Presales

Lower inventory levels will limit the choices of buyers and lead some to consider presales at new construction projects who ordinarily would demand something movein ready. We expect buyers will be willing to commit to a purchase 6 to 12 months before delivery once the economy shows continued signs of recovery and mortgage rates begin to decline. This will help developers achieve more presales than in 2021 and 2022, but still fewer than in previous years. Consumer demand remains focused on immediacy, so developers will need to find ways to meet that demand with smaller developments that can pencil with fewer presales.

RETURN OF ADJUSTABLE-RATE MORTGAGES

The new elevated rates for 30-year fixed-rate mortgages will create demand for other, more flexible products. Chief among these options will be adjustable-rate mortgages. These loans may work better for buyers who can expect their income to grow or don’t plan to stay in the home for more than 5-10 years. Adjustable rates can be an entrée to affordability or create savings on interest in the case of a sale. We also expect to see increased long-term rate options offered by developers during presales.

Rental Market

The historic increase in deliveries expected in 2023 will likely lead to competitive pricing and substantial concessions at the newest, largest buildings. However, supply has rarely outpaced demand for long in the DC market, and the young, well-educated, and growing DC population will probably catch up with the market’s glut of availabilities quickly.

Increased Pipeline Activity

The current frigid state of capital markets creates a window of opportunity down the line for those that can get projects started soon. Optimistic multifamily developers taking sites under control today may bet on capital markets being considerably thawed when they wrap up design and entitlement a year or so from now. Delivery 24 to 30 months after that would find a market with stronger economic conditions, pent-up demand, and continued supply constraints.

WE’LL KNOW (SOMETHING) BY SPRING

While 2022 ended with activity and pricing at year-overyear lows, the winter is always the slowest time of the year for residential sales, and a lack of consumer confidence likely compounded the already slow season. Even if market conditions do not make an abrubt turnaround, it is likely there are buyers simply waiting for some consistency in the economic indicators in order to purchase with more confidence. If things remain steady, we could see this pent-up demand released in a mild spike of activity in the spring. If 2023 instead starts sluggishly, we expect the lag may last for the rest of the year.