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Improvement in Multifamily, but Challenges Remain
Welcome to 2024!
A brand-new year is upon us, and we're glancing back at the one that just passed. 2023 showed a positive trend in apartment demand, bouncing back from the challenges of 2022.
While progress was made, there's still work to be done. Rent growth in 2023 returned to a more typical pace, a shift from the extraordinary surges seen in 2021 and 2022.
Looking forward, there's a sense of optimism for how multifamily properties will perform in 2024, but challenges may still lie ahead.
Please note that all the figures mentioned are specifically for conventional properties with a minimum of 50 units.
Enhancement in Apartment Demand for 2023
In 2023, there was a notable resurgence in national apartment demand, absorbing over 140,000 net units, a substantial 150% increase from 2022. The most significant improvement was observed in Class B and Class C properties.
However, despite positive momentum, the increase in net absorption didn't fully restore the industry to its pre-pandemic annual average. The national average annual net absorption in 2023 was less than half of the figure from 2017 to 2019. The construction pipeline delivered a historic total of over 460,000 new units, contributing to a 240-basis point decline in overall average occupancy nationally and impacting the previously robust rent growth observed in the preceding two years.
Rent Growth
Hits a Roadblock
At the end of 2021, strong national net absorption and increased average occupancy from 92% to 94% contributed to a robust 14% growth in the annual average effective rent for new leases. Transitioning into 2022, despite moderate demand, the year concluded with an 8% rise in average effective rent growth, supported by the solid starting point of 94% national average occupancy.
Shifts in 2023
Rent Landscape
In 2023, the national rental landscape underwent significant shifts. The initial advantage of heightened occupancy at the beginning of the year faded, leading to a substantial decline in the national average to 89% by year-end. The average effective rent growth for new leases experienced a notable drop, decreasing from 8% in 2022 to just 1% in 2023. Although year-to-date rent growth exceeded 2% by the end of August, the last four months of the year saw declines, offsetting half of the gains achieved through August.
The rental market in the previous year witnessed a return to typical seasonality, with subdued rent growth in the first and fourth quarters and concentrated growth in the middle months. In the first seven months of 2022, all months recorded an average effective rent gain of at least 0.8%. In 2023, the rent growth pattern closely followed the typical trend, showing an increase in the second quarter after a slow start to the year. However, a notable deviation occurred as monthly rent growth had declined by August and turned negative by September.
Peering into the Future: Labor Market
In 2023, the labor market experienced a modest cooling while maintaining tight conditions. Despite a minor increase in national unemployment, reaching 3.7%, the rate stabilized, aligning with the pre-COVID pandemic average. The labor force participation rate, although below pre-pandemic levels, showed marginal improvement throughout the year, and both initial and continuing weekly jobless claims remained stable within normal ranges.
Looking ahead to 2024, the labor market is poised to be a critical determinant of multifamily performance, significantly impacting household finances. Recent factors such as rent growth, escalating single-family housing prices, and higher mortgage rates have contributed to a widespread increase in shelter costs. The resumption of student loan payments in the previous year added a debt burden to millions of households, underscoring the interconnectedness of labor market dynamics and the financial well-being of households in the multifamily sector.
Simultaneously, credit card debt has surged, with estimates indicating that around 50% of cardholders carry debt from month to month. Additionally, the personal savings rate, reported by the U.S. Bureau of Economic Analysis, has been at a low point since the beginning of 2022, reminiscent of levels not seen since the 2007-2008 period. The current financial landscape, marked by diminished savings, increased consumption fueled by debt, and rising essential costs, remains manageable as long as the labor market remains tight. However, potential shifts, such as an increase in the unemployment rate, could introduce significant challenges, acting as an emergency brake on financial stability.
Previewing the Future: Single-Family Housing
Previewing the future of single-family housing indicates that challenges such as persistently high mortgage rates, elevated housing prices, and limited supply are expected to persist in 2024. These trends, observed in 2023, are anticipated to continue, potentially contributing to increased demand for multifamily properties in the coming year.
The impact on single-family housing is more concentrated for Class A and Class B properties, especially in markets with a relatively high rate of homeownership. It's essential to note that this shift doesn't guarantee an automatic boost in multifamily demand for 2024.
Builders of new homes have adapted by reallocating floorplan upgrade allowances to mortgage rate buydowns. This strategy aims to attract buyers and compete more effectively with existing home sales, resulting in noteworthy activity in the new home segment of the single-family housing market.
Existing home prices have been resilient due to limited supply, with individuals benefiting from interest rates below 4% reluctant to promptly list their homes. However, if economic and labor market conditions change, households facing financial constraints and high debt levels may need to urgently sell their homes without a steady income, altering the supply dynamics. This could occur when demand is expected to remain subdued, potentially resulting in lower housing prices.
Previewing the Future:
Multifamily New Supply
Anticipating multifamily performance in 2024, one aspect that doesn't require advanced prediction tools is the new supply. With an average construction duration of about 20 months, properties set to enter the market in 2024 were already in the construction phase during 2023.
In 2024, national deliveries are poised to exceed 400,000 units for the third consecutive year. While the Sunbelt attracts attention for its new supply, it's essential to acknowledge that the construction pipeline is a nationwide narrative. According to ALN's tracking, over 1.1 million units across the country have broken ground but are not yet available for lease. Additionally, more than 700,000 units are in various stages of the lease-up phase.
In 2024, national deliveries are expected to exceed 400,000 units for the third consecutive year. While the Sunbelt attracts attention for its new supply, it's crucial to recognize that the construction pipeline is a nationwide narrative. According to ALN's tracking, over 1.1 million units across the country have already broken ground but are not yet available for lease. Additionally, more than 700,000 units are in various stages of the lease-up phase.
When considering the proportion of units under construction compared to existing stock, Boise leads with an impressive 33%, followed by Miami at 30%, Fort Myers – Naples at 22%, Asheville at 21%, and Charlotte at 19%. In the Mountain West and Sunbelt markets near the top of these rankings, the immediate pressure from new supply is expected to pose a challenge but not necessarily result in a doomsday scenario. These regions have generally experienced sustained high levels of population and job growth for a decade or more.
In the Northeast region, including Connecticut, Massachusetts, New York, and Vermont, units currently under construction make up at least 10% of the existing stock at the state level. Vermont, with 38%, stands out due to the relatively small number of existing conventional properties of at least fifty units. The other states fall within the range of 10-13%. While these figures are not massive, it's notable that the net migration data, especially in comparison to the patterns observed in the Mountain West or Sunbelt regions, differs for this Northeastern region.
Key Insights:
The multifamily landscape in 2023 exhibited a mixed scenario. Despite a notable improvement in apartment demand from 2022, it couldn't avert a substantial decline in national average occupancy. This decline was largely attributed to the delivery of over 460,000 new units. The substantial gap between supply and demand, coupled with average occupancy reaching levels not seen in over a decade, led to average effective rent growth barely maintaining positive momentum.
Looking ahead to 2024, a sustained status quo with diminishing inflation, a tight labor market, and low rent growth may play a crucial role in restoring apartment demand to pre-pandemic levels.
However, envisioning a scenario where apartment demand aligns closely with 90% of new deliveries in 2024 to maintain current average occupancy seems nearly impossible. This indicates that 2024 might resemble 2023, marked by low occupancy influencing rent growth while demand continues to improve. Concessions in 2024 are expected to increase, similar to the trends observed in the previous year.
Anticipating 2024, the year introduces additional complexity as it aligns with a presidential election, signs of strain in major global economies, and the continuation of two major wars. Similar to the unexpected onset of the COVID pandemic in 2020, the potential for a black swan event suggests that previous expectations may need to be discarded. Brace yourselves, as 2024 is expected to be anything but dull!
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