Apartment demand will likely remain robust and rent growth remain elevated in 2022, given the current rates of absorption, rising mortgage rates in 2022, and the lower level of construction activity relative to current demand, according to National Association of Realtors blogger Scholastica (Gay) Cororaton.
Demand for multifamily apartments remains strong so far in the fourth quarter, as of Oct. 19, with a net increase of 1.06 million apartment units occupied since Q2 2020. The multifamily vacancy rate has fallen to 4.6% (6.6% in Q2 2020) and the multifamily median asking rent is up 11.4% year-over-year (1.6% in Q2 2020).
Texas has the top two markets with the largest number of apartment units absorbed – Dallas (47,182) and Houston (37,117) – each of which absorbed an amount that was about 6% of the stock of apartment units.
Rounding out the top 10 on this list were New York (34,619); Los Angeles (30,879); Washington, D.C. (22,436); Atlanta (22,272); Chicago (20,810); Austin (20,443); Seattle (18,481); and Phoenix (16,054).
Net absorption in the past 12 months is now positive in the metro areas that saw heavy losses in occupancy in 2020, namely New York, San Francisco, San Jose, and Seattle.
NYC’s Volatile Concessions Situation
Alyssa Brody, Co-Founder of Development Marketing Team (DMT), tells GlobeSt that the New York City rental market certainly saw an uptick and increase in rental pricing and demand toward the end of the spring season, especially in May through October.
“Rentals are typically very seasonal but it does not seem like the momentum is going to stop,” Brody said. “The rental market has an extremely low inventory which may cause rentals to go back to 2019 pricing. The trajectory is seemingly increasing, and the median rental price may even go up.
“We see a significant boost in signed leases because many offices are asking their employees to come back to work. There is a major rise in home-sale price inflation, making it harder for millennials to purchase homes, resulting in more traffic in the rental market.”
Specifically, Brody said her firm, which represents 2 Cooper Sq, a luxury rental building in NoHo, “saw firsthand the difference between Q1/Q2 concessions, going from an average of three months’ free to nearly 100% leased.
She added that currently, “there are no concessions and units increased an average of 5% in pricing by mid-Q3 2021.”
Lack of Supply for Class ‘A’ Assets
Robert Stepp, president, Stepp Commercial, a Los Angeles-based multifamily brokerage firm, tells GlobeSt, “In high-growth cities across the nation, the majority of demand for apartments is coming from young professionals seeking luxury living and amenities. Assets in these ‘A’ locations will continue to see rents rise as there is generally a lack of supply.
“With supply challenges and higher rents deterring many renters, outlying/’B’ areas will also attract those in the workforce looking for a discount to the downtown urban core, however, rent growth for this product is also anticipated to occur at a similar pace as “A” assets.”
Stepp cited, as testimony to the strength of the apartment sector, his firm is experiencing a significant number of investors looking to buy property as well as exchange out of smaller assets and trade into landlord-friendly states with little or to property taxes, among other advantages.
Demand Outweighing Supply
Neil Schimmel, founder and CEO, IMG, tells GlobeSt, “Rents caught fire this year, accelerating rapidly across our portfolio between Q1 and Q3. Across all locations and demographics, rents are now moving up at double-digit rates compared to last year.
Several market elements combine for this lift, Schimmel said, “Inflation pushing up prices everywhere; demand for rental housing outweighing supply; and pent-up turnover that never happened in 2020. Most of these fundamentals should stay in place and we’re expecting rents to climb higher in the near term.”
Supply Chain Issues, Labor Shortages Slow Delivery
Nate Hanks, CEO of RealSource, tells GlobeSt, “As current macro demographic trends push demand for housing, the cost of living has already significantly increased in most locations. RealSource expects apartment demand in most locations will continue at this pace through 2022, while others peak or plateau where affordability levels are stressing workforce housing too far. Over the short-term, expect some of the best producing metros for rent growth to be where single-family home values have grown the most in 2021.”
Hanks said that supply chain issues and labor shortages are slowing delivery timelines for new supply in the pipeline in most locations, which will add to the tailwind for multifamily owners in 2022. “Most locations still face housing shortages, most experts believe it will take years for new supply to find an equilibrium for housing in most major metros,” he said.
Double-Digit Rent Growth in Many Markets
Cororaton reported that rents are rising at a double-digit pace in 127 out of 390 metro areas across major (population over 1 million), large (population over 500,000 to 1 million), medium (population over 250,000 to 500,000), and small markets (population less than 250,000).
Across these markets, Florida metro areas lead the pack with the highest rent growth of over 20% (Palm Beach, Orlando, Tampa, Jacksonville, Sarasota, Port St. Lucie, Fort Myers, Naples, and Punta Gorda).
The demand for apartment units will remain strong in 2022, as higher mortgage rates will ease the demand for owner-occupied homes and increase the demand for rentals. On the other hand, the number of units currently under construction will add to supply.
Currently, there are about 650,000 units under construction, about 75,000 fewer than prior to the pandemic. This level of construction is lower than the current 12-month net absorption of 741,361, which means that vacancy rates will continue to remain tight and rent growth for multifamily units could continue to hover at about 10% in 2022.
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