Multifamily Industry Brief
The storyline for the multifamily industry in 2023 was largely about supply catching up with demand. Rentcafe estimates that from January 2021 through December last year, builders delivered 1.2 million apartment units to the market, with some 460,800 opened in 2023 alone. The key takeaway here isn’t so much that the new inventory drove rents down in several markets where building had the greatest volume, because it did; but rather, for the 18 months beginning in mid-2022 until now, pencils were down for many developers and investors. By now, we all know the reasons for this: the mercurial rise in interest rates coupled with stubbornly high construction costs that is making it difficult to profit from new apartment communities. One builder quipped in a story, “I can build an apartment building for $6 million and at completion, it’s worth $5 million.”
Construction material costs are expected to increase by 2 to 6 percent this year and employee wages by 3 to 5 percent, with totals costs coming in along inflationary lines – from 2 to 4 percent. Even if construction starts slow – as expected, there are still enough projects in the pipeline to prevent price reductions of any significance.
Translation: one suspects there will be a supply shortage by 2026-2027 in a number of markets, as it easily takes 3 years to line up financing and to build even a mid-size apartment community – and that doesn’t take into consideration acquiring and entitling the land. Time will tell.
RealPage, meanwhile, came out with a report citing how the supply boom caught up with demand in six key markets, with the predictable results of declining asking and effective rents to varying degrees across Class A, B and C product.
The six markets are growth-cities and comprised of Austin, Phoenix, Dallas, Orlando, Salt Lake and San Antonio, where overall rents (all classes) declined on average 4.4% on a yearover- year basis. Not surprisingly, rents at newer apartments – often described as ‘luxury’ or simply, Class A, held up better than B and C apartment communities within the same market.
Austin suffered the greatest rental rate declines, with Class A down 6%, B minus 5.7% and C down by 7.9% for the year. Overall rents declined 4.3% in Phoenix and Orlando’s were down 4%, according to RealPage. Other Western cities that experienced higher-than-average levels of in-migration during the pandemic also saw average rents fall. Las Vegas (-2.5%), Boise (-2.4%) and Reno (-1.2%) were among them.
That is hardly to say that rents were down across the U.S. In fact, quite the opposite in the tech-centric and hybrid work haven of San Jose, CA, where rents jumped 9.48% year-overyear, Rent.com reported in December. California as a whole checked in with a medium rent of $2,969 per month – a 0.59% decline from a year earlier.
College towns in the North, Midwest and South largely outperformed other markets in 2023, with Lafayette, LA, posting overall asking rent increases of 11.6%, Madison’s was 9.5%, Knoxville checked in at 8.9% and Syracuse rents jumped 8.1% for the year.
Yardi Matrix, however, posted a national average asking rent increase of 1.6%, though the firm is forecasting an overall decline in rent for 2024, given the record available supply that is hitting markets such as Nashville, Dallas and even tertiary markets like Huntsville, Alabama. Recent trends point to a market that is, overall, stabilizing, and per the earlier note that we could see supply shortage in a few years, rental rate growth is expected to eventually return to a more ‘normal’ 3 to 4 percent annually.
Shifting to the outlook for the multifamily market in 2024, as usual, it largely depends on location. Even so, panelists at the late-January National Multifamily Housing Council Conference in San Diego hinted at low levels of optimism, yet mostly because they had the sense that the worst was over – which is mostly a reference to the Fed’s pause on interest rate increases.
Wall Street has largely expected to see between three and five rate cuts this year, starting as early as May. But that was before the January CPI numbers came in, which showed that inflation has yet to retreat below 3%. Now, it’s anyone’s guess if, when and by how much the Fed could begin to ease monetary policy later this year. Suffice it to say, however, that rate cuts are likely to come later than most in the real estate industry would like to see.
During the conference, RealPage Chief Economist Jay Parsons said that he could see apartment valuations bottoming and cap rates settling in the mid-5% range. He added that buyers seem more resigned to the reality that anything priced more favorably is likely to be older, more challenged assets in less-desirable submarkets.
Others at the conference estimated that there is a much as $240 billion in capital that is waiting to be deployed, once the Fed meaningful cuts rates and investors return to the multifamily market in force.
On multifamily distress, Parsons thinks that much of it will get worked out behind the scenes or extended, while other situations could turn into ‘loan-to-own’ ownership changes where debt funds take over assets and wait it out for better pricing and market recovery.
