Multifamily fundamentals have been choppier than in the past few years but are still solid overall. As we continue to search for our next multifamily acquisition in a great location at a fair price, we are continuously taking stock of market trends, supply/demand metrics, rent growth (digestion), occupancy, and which markets have outperformed or underperformed.  We read all of the major firms’ market research, including Newmark, Marcus & Millichab, CBRE, JLL, Walker & Dunlop, and Berkadia, among others. Here are a few current trends that are notable:

1) Home affordability is much worse now than just a few years ago, with the cost to own a median-priced home doubling versus 2019 pre-Covid levels. The cost of a median-priced home has increased from $315K pre-Covid to $437K today (down from a peak of almost $500K).  When combined with the fact that 30-year loans are now priced at or above 7%, we see that a median-priced home total monthly cost burden is $2960 – $3460 per month, considerably more than many typical apartments which rent for $1200 – $2000 for even newer construction highly amenitized properties (median home ownership costs Principal + Interest $2360, property tax $200-$500, insurance $100-$300, maintenance $150, Water/Sewer/Trash $150). We note that pre-Covid home ownership costs were $1037 Principal + Interest = $1437 – $1837 monthly cost to own a median-priced home, with today’s burden about double the burden of 3-4 short years ago. In short, this means that many people cannot afford to buy or own a home and are thus renters by necessity.

Figure 1. Median Home Prices are Up Significantly But Off Peak Levels

Figure 1 - Median Home Prices are Up Significantly But Off Peak Levels

Source: Newmark Research, Federal Reserve Bank of St Louis

2) Multifamily new supply is growing considerably, with 2023-2024 all-time high delivery years. While the chart below only goes back to the year 2000, we see that 2023 and especially 2024 are large multifamily new supply delivery years. Both 2023 and 2024 should be new all-time high delivery years, beating out previous supply delivery records achieved in the 1970s. Large supply growth — totaling 8% of total apartment inventory from 2023 through 2025 — means that occupancy falls, rental rates tend to soften, and the whole multifamily operating environment becomes significantly more challenging. 
 
Figure 2. 2023 and 2024 are Multifamily New Supply Deliver Records
 
Figure 2 - 2023 and 2024 are Multifamily New Supply Deliver Records
Source: Newmark Research, RealPage
 
3) Total vacancy rates are now at the long-term average and about to get worse than the long-term average with new supply. Below, we see that current national multifamily vacancy rates are at long-term average levels, though with new supply delivery in 2023 and the rest of 2024, vacancy rates will most certainly become worse than the long-term average.  This will pressure property financials, rental rates, concessions, and more.
 
Figure 3. National Multifamily Vacancy Rates at Long-Term Average, but Worsening with New Supply
 
Figure 3 - National Multifamily Vacancy Rates at Long-Term Average but Worsening with New Supply
Source: Newmark Research, RealPage
 
4) Rental rates are still robust year-over-year, but fell on an absolute level in 4Q’22. Below we see that rental rates are still growing on a year-over-year basis as old leases and lower rental rates ‘catch up’ to new higher rental rates and as new lease rates stop growing overall due to significantly ramping supply and overall economic malaise. The overall rental rate picture is still relatively strong after huge rental rate increases seen during Covid due to Fed-induced inflation and still tight multifamily supply back then.
 
Figure 4. Overall Rental Rates Solid on a Year-over-Year Basis, But Stalling on an Absolute Basis
 

Figure 4 - Overall Rental Rates Solid on a Year-over-Year Basis But Stalling on an Absolute Basis

Source: Newmark Research, RealPage
 
5) Some cities are showing relative absorption strength, while others show weakness.  Below we can see new supply in total units over the past year and absorption trends per city. New supply in absolute units is greatest in Phoenix, Dallas, Houston, Washington DC, Austin, and Atlanta.  Absolute supply growth has been least in midwest cities like Memphis, Pittsburgh, Detroit, and Cleveland, and in San Francisco. Looking at Absorption trends over the past year, or total units rented versus total units available, we see that Absorption has been strongest in Newark, Nashville, Austin, Jacksonville, and Charlotte.  Absorption has been weakest in Los Angeles, Houston, Dallas, New York City, Chicago, and Atlanta.
 
Figure 5. New Supply and Absorption Trends by City Show Winners and Losers
 
Figure 5 - New Supply and Absorption Trends by City Show Winners and Losers
 
Source: Newmark Research, RealPage
 

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In conclusion, we see that overall multifamily apartment trends like Occupancy and Rental Rate growth are still robust but are down from peak levels seen a couple of years ago. Substantially ramping new supply combined with lower overall demand due to economic malaise are making for a more challenging near-term environment. The high cost of owning a home is causing many people to remain renters, which is driving some stability to the overall multifamily apartment market. And, while near-term challenges exist, the multifamily apartment sector is a great place to invest for long-term cash flows, appreciation, tax advantages, and diversification away from stocks and bonds.