Main Takeaway: Despite robust demand, the multifamily sector should brace for potential price and rent moderation due to heightened construction activity. Investors should watch regions with supply-demand imbalances, as they could offer lucrative opportunities.
Story: We have a unique situation in the apartment market in the country. Strong demand alongside a strained new construction pipeline from the pandemic has kept upward pressure on asset prices and rents. But that reality is changing, with record supply about to drop in the coming years.
Robust Apartment Demand Still on the Rise
But first, the good news. According to a Globe St report, the multifamily sector will continue to experience strong demand in the coming years. This robust demand could be the new norm with urbanization trends and demographic shifts favoring rental properties. Ownership is getting out of reach for many, pushing demand to new highs.
Demand continues to remain solid for the multifamily asset class as absorption in this year’s first half surged to 98,429 units with an increase of 83,449 units in the second quarter of 2023, according to a new report by Newmark. This number almost quadruples absorption from last year’s first half, and demand is expected to accelerate in the second half of 2023 and beyond to the first half of 2024.
Construction Boom: Record Levels of Apartment Builds
According to Axios, we will see 50-year highs of apartment completions over the coming years. The bulk of those new apartments are located in just 20 metro areas.
Already in the first half of 2023, 198,806 units were delivered, a record, and total deliveries for this year are projected to jump 51% year-over-year. Despite this increase, deliveries are expected to increase even more into 2024.
Further, Axios notes that three-fourths of renters said they’re renting in an area where they can’t afford to buy, highlighting the upcoming stickiness of apartment demand. Only in 2025 are completions expected to taper off, according to RentCafe.
The Rent Riddle: Prices May Begin to Soften
While the demand is robust, the oversupply might lead to a softening of rental rates. CNBC’s analysis highlights the looming decline in rents.
Apartment rents have been cooling off sharply for several months, and they look like they’re about to go negative compared with a year ago. Rents in August were just 0.28% higher than August 2022…Compare that to a year ago, when rents were posting 11% annual growth. With the exception of a very brief drop during the Covid lockdowns, rents have not shown negative annual growth in well over a decade.
Even with the undying demand, Yahoo Finance concurs that rents are starting to plateau.
Potential Consequences: The Investor’s Perspective
Investors must be strategic with rents potentially declining and a flood of new apartments. A diverse portfolio, embracing mixed-use properties, and targeting areas with supply-demand imbalances might be key strategies.
According to reports, among the largest 50 apartment markets, only 14 saw apartment demand outpace supply in Q2 2023. Keeping a close eye on these markets will be important to investors looking to acquire.
For multifamily investors and owners, this equilibrium between supply and demand will be the crux of 2024’s story. Stay updated, stay ahead, and, most importantly, stay data-driven in markets where the relationship between supply and demand is the most favorable.
Expert Take on Apartment Supply
“Many renters will eventually buy homes. But in their current life stage, most renters are content to be renters and enjoy the flexibility that comes with renting.” — RealPage chief economist Jay Parsons