10 Multifamily Insights from the Latest Data Releases

Sponsored by: Madera Residential

Lots of data releases over these past couple weeks – Q2 apartment stats, June inflation/CPI, new construction starts, NMHC’s developer survey, and a renter survey.

So let’s hit the highlights.

#1: Apartment Supply is Very, Very Elevated

We knew it’d be a lot of supply this year. And, yeah, it’s a lot of supply this year. More apartment units completed in the first half of 2024 than in any calendar year between 2001-2013.

And contrary to all the buzz, it’s not just a Sun Belt thing. Supply is at multi-decade highs (and exceeding demand) even in markets like Seattle, Los Angeles, San Diego, Portland, Washington DC, Northern New Jersey and Philadelphia. Of course, the supply/demand gap is smaller in most of these markets than in most Sun Belt/Mountain markets, but … it’s still there (supply > demand) and putting moderate downward pressure on rent, even if not to the same degree as Austin, Phoenix, etc.

#2: There’s A LOT of Demand … and Even MORE Supply … but the Gap is Narrowing.

CoStar, RealPage and Yardi all reported similar trends in their latest releases: There’s a lot of demand – so much that, remarkably, the supply/demand gap is narrowing. But the gap is still there, so vacancy rates are still elevated, but perhaps not nearly as much as some feared.

CoStar: “The U.S. multifamily market continued a strong rebound in demand during the second quarter of 2024, with 170,000 units absorbed, the highest number since the third quarter of 2021. And while 180,000 new units were delivered in the last quarter, this was the smallest supply-demand gap in 11 quarters.”

RealPage: While supply continues to garner the lion’s share of apartment industry-focused headlines, there’s an equally remarkable demand surge brewing across the country … Some 257,000 units have been absorbed during the first two quarters of 2024 … While the gap is closing, record supply continues to moderately outpace demand.”

Yardi: “Multifamily performance remained healthy in June, as strong demand is largely keeping up with rapid supply growth … The market is on track to absorb more than 300,000 units again in 2024, which is a healthy amount.”

Also worth noting: Two-thirds of all net new apartment demand over the past year went to the Sun Belt or Mountain regions – which helped offset some of the big supply hitting these markets.

#3: Apartment Rents are Still Flat Nationally

Apartment rents have been flat-ish nationally for a full year. RealPage reported YoY effective new lease rent growth of 0.2%, Yardi said 0.6% and CoStar 0.9%.

On renewal rents, RealPage reported renewal trade-out easing to 4.0%, the lowest levels since the first half of 2021. We’ll likely see further compression due to shrinking loss-to-lease and expanding competition for renters.

Meanwhile, wage growth continues to outpace rents – which likely contributes to improved demand.

#4: It’s Still All About Supply and Demand

Of course, rent growth varies by market. And not surprisingly, the laws of supply and demand remain in full force: Rents are growing most where new supply is very limited, and rents are contracting most where new supply is arriving in big volumes.

This chart captures the phenomenon quite well – mapping rent growth together with supply growth.

Rents are climbing most in the lower-supplied Midwest and Northeast regions, and especially in smaller markets like Syracuse, Lincoln, Louisville, Midland and Dayton. Among larger markets, leaders included Hartford, Providence, Kansas City, Washington DC, Cleveland, Cincinnati, Milwaukee, Greensboro and Virginia Beach.

(I wrote more extensively about this on LinkedIn this week.)

#5: Shelter Inflation is FINALLY Catching Up With Rent Realities

It’s finally happening: CPI Shelter’s lagged methodologies are finally starting to reflect the realities that rental housing operators see on the ground. Month-over-month shelter inflation cooled to the lowest levels since January 2021. AND it’s actually now BELOW the pre-COVID norms, too.

Shelter is about one-third of the CPI, so it played a big role in headline inflation coming in cool for June … and perhaps helping boost the odds for a rate cut sooner than later.

#6: Expense Growth is Moderating, But Still Outpaces Revenues

Yardi: “Expense growth seems to be moderating. Through April 2024, expenses rose at a 4.2% annual rate” compared to 8.2% in 2022 and 8.0% in 2023. RealPage reported a similar trend, with operating expense growth cooling from 9.8% in May 2023 to 5.5% in May 2024.

Of course, expenses are still growing faster than revenues, but the gap narrowed a bit.

Not much is getting cheaper, but the pace of expense growth has cooled significantly for insurance premiums (finally), according to both Yardi and RealPage.

Operators also appear to be reining in marketing spend. Marketing expense per unit jumped 16% year-over-year in May 2023, but was flat year-over-year in May 2024, according to RealPage.

Of the major expense categories, payroll remains the one that operators are still struggling to tame – as cost-savings efforts conflict with on-site staff retention efforts.

#7: Resident Retention Rates Remain Surprisingly High (For Now?)

I did not expect apartment retention rates to INCREASE in 2024 at the same time new supply soared to nearly 50-year highs – giving renters more options. But that’s what appears to be happening … at least for now.

Retention rates improved by 180 bps from June 2023 to June 2024, up to 54.4% -- which is below peak 2020-2022, but well above pre-pandemic norms for June.

There’s been intense efforts by property managers to focus on resident retention this year, and clearly it’s paying off. But I’m still skeptical retention can hold this high, and a new renter survey from Apartments dot com suggests I might eventually be right.

The survey showed that “nearly half of renters expect their move to happen within six months,” which was a two-year high. (The survey has some other interesting stuff, too, including that “37% of renters likely to rent sight unseen.”)

#8: Apartment Lease-Up Competition is Intense

While there’s A LOT of apartment demand out there, there’s even more supply … which means all that demand is getting divvied up among a greater number of properties … especially at the highest price points, where new lease-ups are concentrated.

Lease-up velocity appears to be slowing even as supply is surging, and operators are having to cut rents (not just offer concessions) to fill up. Remember that developers usually need to reach stabilized occupancy before they can refinance or sell, so there’s going to be some tension between the need to fill up versus the need to achieve pro forma rents.

More to come on this…

#9: Construction Starts Continue to Plummet

While there’s a lot of supply hitting in 2024 and early 2025, there’s dramatically less coming later in 2025 and into 2026-27. Excluding a hot minute during the 2020 pandemic, annualized multifamily starts are at the lowest levels since September 2016 and looking increasingly more like the 2011-2013 era, based on Census data.

My personal view is that supply in 2026-27 will not merely “normalize,” as some are saying, but will drop below pre-COVID averages.

#10: Developer Survey: New Apartment Projects Don’t Pencil Out

NMHC released its quarterly apartment developer/builder survey, and it confirms what we all knew: Most projects aren’t penciling out these days.

Asked top reasons for delayed starts:

• 77% said “project is not economically feasible at this time”

• 73% blamed “economic uncertainty”

• 46% blamed “availability of construction financing”

• 46% blamed “permitting, entitlement and professional services.”

Few takeaways:

• New starts are plunging thanks to flat/falling rents, high rates, sticky costs plus that pesky reality that investors can often buy cheaper than they can build right now.

• Construction financing is available, but at rates/terms that most projects can’t afford.

• We all know we need to reform the zoning and permitting processes (and we should!), but even if a city perfectly streamlined the process, the impact would be muted because of the other headwinds. So we’ll need other solutions – like more cities pushing tax incentives for attainable or affordable housing.

Here’s What Caught My Eye Recently:

Jeff Stein at The Washington Post notes that while President Biden’s recent comments come across as a call for universal rent control, that probably isn’t what he is talking about – as the White House policy is specific to affordable housing properties attached to the Low Income Housing Tax Credit.

Joe Weisenthal dropping truth on wage inflation and then doing it again.

Omair Sharif has done a great job tracking the technical workings of CPI’s shelter measures.

Lance Lambert posts on institutional single-family investors remaining sidelined.

Lance also posted about worries around property insurance premiums in SFR, which is interesting to see as it seems to lag behind multifamily (where premiums rose much earlier in most of U.S.).

CRE Analyst writes about Green Street’s call that the market has bottomed.

CRE Analyst also took on The New York Times article about potential struggles facing apartments.

Alex Thomas posts data showing “today's homebuyers have never been more creditworthy.”

Carl Whitaker writes about how apartment occupancy numbers might be more impressive than we think.

Willy Walker did a great interview with The Motley Fool talking about how there’s a lot of buyers, but not a lot of sellers at today’s prices.

Sean Sweeney writes about the reality for apartment developers: If it’s cheaper to buy than build, you probably shouldn’t build.

I don’t know who made this, but this chart posted by Jens von Bergmann is spot on:

Disclaimer: The contents of this newsletter are for informational purposes, not investment advice. No recommendation or advice is being given.

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