Jim Tatum
The multifamily market remains fundamentally strong, but will be significantly slower in the coming year.
Multifamily, especially the apartment sector, started 2022 in a strong position, with market momentum continuing from 2021, which was the best year in the apartment industry’s history, according to a report by the National Apartment Association. However, by third quarter 2022, sluggish leasing activity, negative absorption, decreasing occupancy rates and monthly declines in rents began to surface. Both RealPage and Apartment List reported three consecutive decreases in rents from September through November. Apartment List average national rents declined by one percent in November, a larger drop than during the pandemic lockdowns. And according to the Census Housing Vacancy Survey, new renter household formation declined in the second and third quarters by 577,000; this occurred right after a post-pandemic boom of some 3.4 million renter households.
According to the survey, as inflation — including rent growth — has continued to outpace wage growth, layoffs are taking hold in some industries. The resulting economic uncertainty has caused renters to combine households for cost savings, rather than making new moves, according to the survey. And labor market challenges, inflation, interest rate increases and challenging regulatory environments, along with expenses outpacing rent growth will continue to be a major concern, especially for owners and operators. However, as long as the labor market doesn’t suffer major setbacks, apartment fundamentals overall should be able to post positive gains, particularly in those sectors which typically experience sustained demand through a downturn.
Demographics remain a positive for multifamily. While many older millennials have already become homeowners, younger millennials just starting families will be in the market for single-family rentals. With more than one in five U.S. residents identifying as Gen Z (10 to 25 years old), steady demand for apartments should continue.
According to Berkadia’s National Apartment Research Report 2023 Forecast, the U.S. occupancy rate is expected to settle at 95.0 in the last quarter of 2023, which, while down 70 basis points over last year, is still higher than the pre-pandemic cycle average of 94.7% during 2010 – 2019. While occupancy rate is expected to drop, rents are expected to see modest growth, with an effective rate of $1,827, or a 3.3% increase, expected by year end.
According to Berkadia, multifamily developers have increased construction projects in order to help meet a sharp demand caused in great part by single family construction slowdown that occurred after the 2008 recession. The result is expected to be an increase in new units, with some 565,200 new apartment units scheduled to come online by end of year 2023, the highest number of new apartments completed in 20 years.
The Sun Belt and Coastal markets remain the most active, with the Dallas-Fort Worth, Phoenix, and Austin markets expected to lead the way in additional apartment units coming online in 2023, according to Berkadia.
