Multifamily Rents Show Resilience Despite Economic Uncertainty

Despite continued economic uncertainty, multifamily rents have continued to increase through the first half of the year due to the demand created by strong job growth and new household formations, according to a new outlook from Yardi Matrix.

“We anticipate that rents will continue to increase modestly over the course of the year as demand has firmed, albeit at a more moderate rate in line with historic growth levels,” stated the U.S. Multifamily Outlook.

Over the first five months of the year, U.S. asking rents increased $17, or 0.9%, with year-over-year growth dropping to 2.6%. In May, the nation’s average apartment rent reached an all-time high of $1,716. Yardi Matrix is predicting rent growth to decelerate for the year at 2.5%.

Among major metros, Central New Jersey is expected to lead the nation in rent growth for the year at 3.7%, followed by Austin, Texas, and Albuquerque, New Mexico at 3.3%. Other metros looking to see growth over 3% include Charlotte, North Carolina; Salt Lake City; Birmingham, Alabama; Tucson, Arizona; and Oklahoma City.

According to Yardi Matrix, challenges for the multifamily industry include slowing demand, affordability issues, slower population growth, and competition from the over 880,000 new units that are expected to come online through the end of 2024.

The capital side of the industry continues to face significant headwinds due to higher mortgage rates. Property values are down 15% to 20% from their peak and are still declining with cost of capital becoming more expensive.

In addition, property sales at 2023’s halfway mark are 70% below the same period last year and are expected to remain weak with the uncertainty around pricing and sellers unwilling to transact at lower prices.

The report also noted the debt market’s struggles with higher interest rates and the corresponding decrease in volume, even among the government-sponsored enterprises.

“Borrowers are resisting higher rates unless they have no choice,” stated the report. “Defaults will rise over the next 24 months as owners attempt to refinance low-coupon loans at new higher rates.”

New deliveries will remain high through at least the end of 2024 as the 1 million units under construction in the first half of the year come online. Yardi Matrix forecasts 430,000 unit deliveries this year, an increase of 2.8% of stock, and over 450,000 units in 2024, with the supply concentrated in the Sun Belt. “Starts are gradually declining because debt is more expensive and fewer banks are financing construction,” noted the report.

For 2023, deliveries primarily will be in 10 to 15 of the fastest-growing markets. The most deliveries are expected in Austin, Texas, with 22,310 units; Dallas, 21,769 units; Miami, 18,571 units; Atlanta, 15,611 units; New York City, 15,510 units; and Phoenix, 13,952 units. Markets with the highest percentage of increases include Austin at 8.2%; Salt Lake City and Jacksonville, Florida, at 6.4%; and Charlotte and Raleigh-Durham, North Carolina, at 5.8% and 5.7%, respectively.