Multifamily Market Stabilization: Rent Growth and Vacancy Rates Improve

The last two years have proven challenging for the multifamily industry, with declining rent growth, rising vacancy, and surging supply. However, the corner may finally be turning, indicating multifamily market stabilization. Jay Lybik, national director of multifamily analytics for CoStar, highlighted these emerging signs in a recent webinar and offered his predictions for the third and fourth quarters of 2024.

Demand Shows a Solid Comeback

The second quarter saw a boom in multifamily demand, with 170,000 units absorbed. This is the highest total seen since the third quarter of 2021, Lybik said. Despite supply that remains near record highs, this increase in demand helped shrink the supply-demand gap to the smallest it’s been in 11 quarters. The supply-demand gap is projected to equalize further in 2025, when projected deliveries are expected to drop by 40 percent.

Vacancy Rates Hold Steady

Thanks to the rise in demand, the national vacancy rate has stopped the sharp upward trendline that began in 2021. After rising slightly from the fourth quarter of 2023 to the first quarter of 2024, the vacancy rate has remained at 7.8 percent for the last two quarters. “This is the first time vacancy hasn’t risen in almost three years,” Lybik said, “and it’s forecast to hold stable through the end of the year.”

Rent Growth Slowdown Has Stopped

Vacancy isn’t the only indicator that appears to be stabilizing. After dropping precipitously from pandemic-era highs, rent growth has been hovering around 1 percent since the middle of last year. This represents a dramatic change, Lybik said, and could even pave the way for rent growth to begin to rise in the third quarter. CoStar forecasts show a slight uptick in rent growth for Q3 and Q4.

Recovery Across Price Points and Regions

Not all segments and regions of the market are equally poised to begin the recovery, however. Luxury apartments, known in the CoStar building rating system as four- and five-star properties, will lag behind. Oversupply has hit this category the hardest. As a result, improvements in rent growth for luxury apartments have remained modest. Rent growth for this class rose from negative territory to 0.2 percent, underperforming both the national average (1 percent) and the average for mid-priced apartments (1.5 percent).

From a regional perspective, the Sun Belt faces similar struggles. This region, after pandemic-era success, now confronts a significant mismatch between high supply and low demand. This has driven rent growth for the region into the red. In the second quarter, the Sun Belt posted cumulative rent growth of negative 1.3 percent, while the Midwest and Northeast tied for first place with 2.5 percent.

Despite these differences, conditions will gradually improve for all price points and regions. “Overall, 2024 has gotten off to a strong start,” Lybik said. At the same time, he warned that inflation and the potential for recession remain significant downside risks for multifamily fundamentals.

Source: https://www.apartments.com/grow/learning-center/state-of-the-market-mid-year-2024-webinar https://www.creconsult.net/market-trends/multifamily-market-stabilization-2024/

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Multifamily Absorption Posts Strongest Quarter Since 2000

Year-to-date (YTD) absorption has nearly surpassed the total demand from last year

A new report from Cushman & Wakefield bears out the findings of other research reports, namely that demand for multifamily units is booming and so is absorption. Vacancy has reached its lowest point since mid-2021. With construction way down, all the signs point to a recovery of fundamentals, including rents, in the next two years.

With 138,000 units absorbed in the second quarter, multifamily vacancies were pushed down 10 basis points. "Year-to-date (YTD) absorption has nearly surpassed the total demand from last year and is up 75% over the first half of 2023," Cushman reported. It believes the future looks good as a resilient labor market stimulates household formation and wages grow.

2Q2024 was the strongest quarter on record since 2000, the report said. Year-to-date saw absorption of nearly 230,000 units, almost surpassing the total of 253,000 units for the whole of 2023.

"At 8.6%, vacancy remains 150 bps above pre-pandemic levels, but stellar demand levels have resulted in a directional change in the vacancy rate for the first time in 11 quarters," Cushman said.

There were lower vacancy rates in more than half of the 90 markets Cushman tracks in the second quarter than in the first. The sharpest drops were in Reno, Minneapolis, and Richmond. In each city, vacancy fell more than 90 bps in the quarter. By region, vacancies in the Midwest dropped about 30 bps. Even the Sunbelt, with the highest regional vacancy rate of 10%, saw it fall for the first time since the pandemic, with absorption rising most in Dallas/Fort Worth, Houston, New York, Austin, and Atlanta.

Despite the surge in uptake, asking rent growth did not match it. It climbed 1.7% over the year, about half its historical average. "The competition for leasing remains fierce in the face of nearly 265,000 units that were delivered in the first half of 2024," the report noted.

The Midwest (4%) and Northeast (3.3%) continued to lead the nation in annual rent growth. The Sun Belt, up 1% quarter-over-quarter, and the West, up 0.9%, could only manage slight upticks in rent.

"Approximately 695,000 units remain under construction, which will create more competition for leases over the next 18 months." At the same time, the 130,000 units started in 2024 are 60% fewer than in the same period in 2023. "The sharp falloff in new construction starts has emptied the pipeline as projects deliver. For the first time since the third quarter of 2021, the Sun Belt no longer has the largest share of units under construction as a percentage of its inventory. That honor now belongs to the Northeast, with 6.2% of its inventory under construction."

Despite the falloff, the report said Sunbelt markets could recover more quickly than the supply pipeline suggests because they are some of the most in demand in the nation. For the nation as a whole, Cushman predicted that fundamentals should begin to recover in 2025–2026.

Source: Multifamily Absorption Posts Strongest Quarter Since 2000

https://www.creconsult.net/market-trends/multifamily-housing-demand-record-absorption/

Annual Multifamily Rent Growth Remains Steady at 1%

Annual multifamily rent growth has hovered around 1% for about a year following a rapid deceleration in 2021 and 2022.

The U.S. multifamily market has enjoyed the smallest supply-demand gap in 11 quarters as it absorbed 170,000 units during the second quarter on 180,000 new units delivered. Vacancy remained stable from the first quarter at 7.8%, marking the first quarter in almost 3 years that vacancy has not risen, according to a report on 2Q multifamily rent trends by Apartments.com.

Asking rent growth dipped slightly year over year during June to 0.9% compared with 1% growth in the four prior months, although month-to-month rent growth decelerated to 0.1% after three months of 0.4% growth. Annual rent growth has hovered around 1% for about a year following a rapid deceleration in 2021 and 2022.

Both Midwest and Northeast markets turned in a strong performance with rent growth of 2.4% over the past four quarters. These markets have benefited from avoiding oversupply conditions, the report said. Western markets posted rent growth of 0.5% on weak demand and elevated completions, and heavy oversupply conditions in the South kept annual rent growth at zero, according to the report.

Louisville, Kentucky, posted the strongest annual asking rent growth of the top 50 markets nationwide at 4.9%, followed closely by Cleveland and Washington, D.C. Meanwhile, rents fell by 5.7% in Austin, Texas, while rent losses ranged from 3.1% to 2.2% in Tucson, Arizona; Raleigh, North Carolina; Jacksonville, Florida; and Atlanta. Eight of the bottom ten performing markets are in the South, where supply-demand imbalances remain a challenge, said Apartments.com.

Most new supply in multifamily is aimed at the luxury market (4- and 5-star units), which led absorption with just over 123,000 units for the quarter. However, rent growth was stronger in the mid-priced 3-star property market at 1.5% compared with the luxury market where rents grew only 0.2% at the end of June. Net absorption in the 3-star market was 43,000 during the second quarter, up from 33,000 units in the first three months. Improving consumer confidence, lower inflation and sustained economic expansion helped boost 3-star demand, the report said.

Those factors also boosted demand for 1- and 2-star properties, which posted positive absorption for the first time in 2 years. Households at this price point struggled in 2022 and 2023 with higher housing costs and the elevated costs of everyday items, pushing some to seek alternative housing solutions such as moving in with roommates or returning to the family home.

The multifamily market is projected to add 574,000 units in 2024, which is only a slight pullback from the prior year's record. Markets in the South and luxury properties remain most at risk for weakness due to oversupply conditions, while Midwest and Northeast locations and mid-priced 3-star properties could outperform, the report said.

Source: Midwest, Northeast Highlight Improving Multifamily Market

https://www.creconsult.net/market-trends/annual-multifamily-rent-growth-2024/

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16K SF Industrial Property 7.2% Cap Rate
PRICE: $1,200,000
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LISTING BROKER: Randolph Taylor, CCIM
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PROPERTY WEBSITE/OM:
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