A slowdown in new construction but a surge in new deliveries with an occupancy rate still higher than normal. That’s what Berkadia predicts for the Indianapolis apartment market in 2023.
In its 2023 forecast for the Indianapolis multifamily market, Berkadia reports that 4,657 multifamily units are expected to deliver in 2023, more than double the Indianapolis market’s pre-pandemic average. Berkadia is also forecasting net absorption to reach 2,773 units this year, a figure higher than the pre-pandemic average of 2,696 units from 2010 through 2019.
Even with a surge in new apartment deliveries, Berkadia predicts that the average multifamily occupancy rate in the Indianapolis metropolitan area should hold steady at 94.7% in 2023. That’d be down 100 basis points from the average in 2022 but is still higher than the 10-year pre-pandemic average of 93.1%.
Chris Bruzas, managing director of investment sales in Berkadia’s Indianapolis office, said that the largely positive forecast is a testament to the resilience of the local apartment market, one that has held steady even during the COVID-19 pandemic and now as the country deals with rising interest rates and persistent inflation.
“Indianapolis has done well even as of late when some cities are starting to hit a peak in rent growth,” Bruzas said. “There are outside factors nationally that are hitting our market like they are hitting all markets, interest rates, the threat of a recession. But if you zoom in on Indianapolis, everyone is still doing well here. We have strong multifamily rent growth. Rent growth is tapering off, but it’s still growing. Our occupancy rates might be hit a little but are still strong.”
This isn’t surprising to Bruzas. The Indianapolis market has always performed well during challenging economic times, he said. That’s a result of the market’s more conservative nature, he said.
“We are going to hit a ceiling when it comes to rent growth. That’s just the realistic view,” Bruzas said. “But it will take us a while longer to get there. That’s how Indianapolis has always been, slower and steady. But steady is good during a pandemic or when a recession is coming.”
Berkadia predicts that the average asking monthly rent for Indianapolis-area apartment units should hit $1,243 in 2023. That figure would be up 3.7% on a year-over-year basis.
That’s still rent growth. But it’s also growth that is slowing, something that was inevitable. It’s not realistic to expect apartment rents in any market to continue to grow by double digit percentages each year.
“We expect rents to continue to grow in the first quarter of this year,” Bruzas said. “But we don’t expect them to keep growing a year from now. And double-digit rent growth? That reality has changed.”
As Bruzas says, the monthly rent that people can afford is tied to their employment. With the possibility of a recession hitting the United States this year, many renters are worried about the stability of their jobs. Because of this, they might not be as willing to pay as much to rent an apartment.
A positive for Indianapolis, though, is that monthly rents here aren’t as high as they are in many other big cities. Because of this, some renters will choose to live in Indianapolis instead of cities such as Chicago or New York, which will help keep demand for apartment units strong here.
“If you don’t have a job, you’re not getting the raise you wanted or if inflation is hitting your wallet, you have to pare down somewhere. It’s simple math,” Bruzas said.
A slowdown in new construction?
While Berkadia predicts that more than 4,600 apartment units will deliver in the Indianapolis market this year, it’s almost certain, too, that new apartment starts will slow in 2023.
There are several reasons for this slowdown: Interest rates are high. It’s difficult to find labor. Plenty of new apartment units have already hit the market.
“Talking to people, no one is anxious to get deals off the ground right now,” Bruzas said. “No one knows what will happen with interest rates. The word ‘recession’ is being mentioned in any conversation, whether that conversation is five minutes long or an hour long. I don’t expect a lot of announcements on new developments over the next year. When you are looking at interest rates and construction financing, new development just isn’t that attractive right now.”
What hasn’t changed is that investors still view multifamily as a strong investment, Bruzas said.
He pointed to a recent deal Berkadia made. He and his team negotiated the sale of a 400-unit apartment property just south of downtown Indianapolis in late December of last year. The building was a value-add property built in the 1960s.
Bruzas said that a year ago he could have sold this property to five buyers almost instantly. Today, Berkadia faced a different buyer pool. The buyer who did purchase this multifamily property was able to get the property at a bit of a lower price. The buyer also didn’t have to fight it out with nearly as many competitors. As Bruzas said, six months ago, this property might have fetched 30 offers.
These are the buyers, the smaller ones that might not have won as many deals during the last two years, who will find opportunities in today’s multifamily market, Bruzas said.
“Apartments are still a good deal for investors,” Bruzas said. “The Indianapolis apartment market had 10% rent growth over the last year. At the same time, the Dow is down. If multifamily isn’t the hottest, it is one of the hottest investments in real estate right now. That hasn’t changed.”
Berkadia enjoyed a strong year in the Indianapolis multifamily market in 2022, with Bruzas saying that the company sold about 6,000 units throughout the entire state.
And the future? While 2023 will be a transition year, Bruzas says that that the Indianapolis apartment market will remain a strong and steady one.
“Most of the owners who had planned to sell their apartment properties in 2023 went ahead and did it in 2022,” Bruzas said. “If we took half of what we did in 2022 and put those deals in 2023, we’d still have a normal year in our market. We had a record-shattering year last year. It helps to have some perspective on how strong last year was. No year is going to look as good following 2022.”