Despite a consistent blast of overlapping headwinds, I found multifamily housing delivered a strong performance in 2023. The year, from my perspective, demonstrated multifamily real estate’s economic resilience during inflationary periods and furthered its reputation as a preferred post-pandemic asset in commercial real estate. Smart multifamily managers have thrived in this market.
I’m bullish on multifamily real estate for 2024, even as the economic landscape shifts. Although inflation and interest rates show cooling signs, I expect strong demand, leveling rents and rich growth in regional and asset-type submarkets. Some are rightly “cautious” about multifamily’s future, but I’m more confident, particularly since, as Goldman Sachs suggests, recession fears have diminished. This means I’m hoisting the sails for a positive year. Here’s what I see as the top multifamily housing trends leaders in the industry need to pay attention to this year.
Rental demand continues as the housing market churns.
Multifamily demand has challenged conventions over the past three years but seems to be mitigating toward a “normal.” Unit absorption trended positive for the first three quarters of 2023, according to data from RealPage, which I see as an equalizing sign. Occupancy rates were around 94.5% in the third quarter, another stabilizing factor that coincided with low rates of rent growth.
I expect demand to be firm, or perhaps show an incremental increase, as the housing market churns. Some experts have projected housing prices to rise 3% to 4% in 2024 as interest rates cling to the high bar, new starts soften and demand dips. As I see it, construction costs and supply issues will continue to impact home starts in 2024. Concurrently, those issues also will affect multifamily construction.
Fannie Mae predicted vacancy rates to climb above 6% in 2024, in part due to about 1 million new units coming online. Yet, my team has been seeing more ground-up construction being frozen. From my observations, the supply surge since 2020 appears to be slowing, and I anticipate fewer units coming online than projected over the next three years. Avison Young reported in October 2023 that construction starts fell 58.6% year-over-year. As a result, I don’t anticipate a formidable demand drop, though several economic factors could change that. Notably, those with federal student loans resumed repayment plans in late 2023, which has added another budget line item alongside rent.
Rent growth should moderate.
Rent growth ticked positive in October 2023, according to Zillow, after falling monthly for more than a year. The slight increase could be seasonal, aberrational or a hint that rent growth might be trending upward. I envision rent growth moderating based on several factors.
In July, Fannie Mae projected the rent-growth rate to touch down between 1.5% and 2% at the end of 2023, while Yardi Matrix expected that job growth and new household formation would settle the rate at 2.5%. Fannie Mae projected rent growth in most markets to linger between 1% and 2% in 2024, as did ReaPage.
According to Zillow, we should see rent growth continue to cool based on the “onslaught of new multifamily construction.” Again, I anticipate unit growth but remain unsure about this onslaught. Oversupply is impacting absorption rates in certain submarkets, creating concern about demand-supply imbalance. However, I don’t anticipate rent growth to fall precipitously.
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