Newmark: Spread Between Rent Vs. Own Accelerates

Renting was significantly more affordable in the third quarter than owning, according to a new report from Newmark. Due to high home prices and interest rates, the spread between homeownership and rental costs grew $994, increasing by 15.4% from the second quarter.

The third quarter also saw demand increase to 91,000 units, rising 12.7% from the second quarter. The second and third quarters, which tend to be the strongest leasing periods of the year, had 171,000 units absorbed compared with the negative 148,000 the prior year. According to Newmark, Southern markets comprised 61% of demand through the third quarter. Texas’ Houston, Dallas-Fort Worth, and Austin were the top three markets for nominal demand, combining for 30.3% of demand throughout the nation.

Over 128,000 multifamily units were delivered in the third quarter, the largest quarterly sum on record. Newmark shared that this record is expected to be broken several times over the next few quarters.

Inventory growth at 2.1% is 70 basis points above the long-term average and is forecast to climb to 3.4% throughout the coming year. New supply outpaced demand by 278,000 units as of the third quarter; however, Newmark said this is still a big improvement over what was seen in the first quarter.

According to Newmark, vacancies trended upward for the fifth consecutive quarter, increasing 131 basis points year over year to 5.5%—the highest rate since the first quarter of 2014. While quarterly rent growth increased 0.5%, year-over-year growth contracted to 0.4%. As of the third quarter, annualized rent growth is at a 10-quarter low.

While growth markets in the Sun Belt have experienced the largest year-over-year declines in rent growth, Northeast and Midwest markets are faring well. Newark, New Jersey, and Cincinnati lead the way for growth at 4.9% and 4.5%, respectively.

Other key takeaways from Newmark’s 3Q23 United States Multifamily Capital Markets Report include:

  • Renewals have outperformed new lease trade-outs by 430 basis points. In addition, Class C properties have continued to outperform Class A and B communities;
  • Year over year, expenses have increased 8.1% for multifamily operators, led by a 25.4% surge in insurance costs. Management and other expenses also saw double-digit increases. Charleston, South Carolina, and Florida’s Tampa and Orlando experienced the biggest increases in year-over-year expenses, due in part to insurance growth of 38% or greater;
  • Between this year and 2025, $682 billion in multifamily loans will mature. While banks account for 32% of debt maturities in the 2023-to-2032 period, they account for 52% of maturities between 2023 and 2025. Debt funds account for 19% of near-term maturities while only 11% for the full period; and
  • The investment sales market saw a 61.7% year-over-year decrease in quarterly sales volume to $30.1 billion. However, multifamily remains the largest share of investment sales of the commercial real estate sector at 32.4% through the third quarter, although higher rates and lower yields have resulted in a 7.3% decrease in market share since 2022.

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