Is Multifamily Turning the Corner?

Sponsored by: Madera Residential

It’s certainly NOT all sunshine and rainbows (as the Fed punted on rate cuts yet again yesterday), BUT there are some emerging indicators that the U.S. apartment sector is turning the corner… at least in terms of apartment demand, renter health (among market-rate renters, specifically), AND even on rents in some markets.

#1 Apartment Demand is Huge

It appears 1H’24 net absorption is on track to approach 300,000 units – a blistering tally that, if it holds through June, would:

• Top the FULL CALENDAR YEAR absorption for 2023, and…

• Put 2024 on pace to be the U.S. apartment market’s second-best year in decades, behind only 2021 (as 2H’21 demand was off the charts), and…

• Keep national occupancy rates surprisingly flat-ish, as they’ve been in recent months (according to RealPage and Yardi data) DESPITE being amidst the nation’s largest supply wave in 4+ decades.

Never before has flat occupancy been so impressive. (Disclaimer: We’re not even at the mid-point of 2024 yet and there’s a lot of supply hitting later this year, so there’s certainly the possibility that this trend doesn’t stick through year end.)

What’s driving all this demand? Yes, certainly it helps that move-outs to home purchase are way down. That impacts retention, which in turn impacts net absorption. BUT don’t give the stalled-out housing market all the credit. I highly doubt many of these net new apartment renter households are jilted wanna-be homebuyers. Most would-be buyers are already renters, and a chunk of them will migrate from apartments into single-family rentals as life stages evolve.

Most of this net new demand is quite likely within the traditional apartment demographics – young adults in their 20s and early 30s, who continue to benefit from outsized wage growth relative to their older peers plus strong job growth.

The traditional new apartment entrant isn’t buying a house even if mortgage rates are 0%. They’re just not in that life stage yet, as studies show this younger demographic values the flexibility of renting (at least for now).

#2 Rent-to-Income Ratios are Trending Toward Pre-Pandemic Levels

Another demand boost: Operators are pricing to move units, as I highlighted in the previous newsletter. National year-over-year rent change (for same-store new leases, inclusive of concessions) has fluttered around 0% for 11 straight months.

We’re likely closing in on 19 straight months where wage growth has topped new lease rent growth – which means rent-to-income ratios are retreating again. My friend Carl Whitaker had a great post on this topic recently, concluding that rent-to-income ratios (among new lease signers) are nearing the pre-pandemic norms of 21-22%.

That’s great news for renters and operators/investors alike. It translates to a higher volume of qualified demand across the price spectrum.

#3 Rents are Regaining Momentum in Certain Markets

Here’s one more possible indicator supporting the theory that the apartment market may be bottoming.

Check out these rent stats:

• Of the 50 largest metro areas, 31 recorded (mostly slight) improvement in year-over-year effective rent growth between April and May, according to RealPage data. That’s the largest number of upward-trending markets since early 2022, and it’s primarily driven by lesser-supplied markets — another reminder that if you really care about rental affordability, you should be demolishing barriers (regulatory and otherwise) to new construction.

• Eight metros have recorded improvement in YoY rent change for at least FIVE consecutive months: Greensboro, Pittsburgh, Sacramento, San Francisco, Riverside, Las Vegas, Portland and Phoenix. (There’s some mixed stories within this group, which I wrote about on LinkedIn this week.)

• In fairness, a number of metros continue to see (mostly moderate) rent movement in the opposite direction. And rents are still down at least 4% YoY in high-supplied markets like Austin, Jacksonville, Atlanta, San Antonio and Raleigh.

My guess? I think we’ll see lower-supplied markets stabilize at normal-ish rent growth numbers (2-5%). We’ll likely have to wait out a rebound in the high-supplied markets. BUT it’s kinda remarkable to see rents falling ONLY in the low/mid single-digits even in markets with 5-10+% inventory growth (which is wildly high supply expansion). The demand story is quite impressive.

As supply wanes in 2025-26-27, you could make a strong case that (barring a black swan event) some of these ultra-high-supplied markets could return to the national rent growth leaderboard – where they were for much of the prior decade thanks to demand > supply.

My Favorite Chart of the Week

Here’s What Caught My Eye Recently:

• CRE Analyst has a great post diving into potential emerging challenges for syndicators who went heavy on older vintage apartments at peak prices.

• Speaking of apartment syndicators, Prashant Gopal, Patrick Clark, and Scott Carpenter tackle the topic in an article for Bloomberg.

• Carl Whitaker writes about rapidly improving rent-to-income ratios among market-rate apartment renters.

• Rick Palacios Jr. shares data from colleagues at John Burns Research & Consulting that shows continued growth in the number of U.S. workers working from home – even post pandemic.

• USA Today published an article about the growing role of build-for-rent communities to fill the housing gap.

• Mike Simonsen shows how there’s an inverse correlation between a state’s per capita income and its homeownership rate… meaning poorer states have higher homeownership rates. (Ironically, many of these high homeownership rate states also have higher presence of “institutional” SFR ownership – a factoid that should help debunk boogeyman theories on impact of institutional SFR.

• Mark Allen shares data on how expectations for increased multifamily sales in 2024 aren’t playing out so far – even in the nation’s top market for apartment transactions (DFW).

• Will Parker writes for the Wall Street Journal about the decline in new apartment construction.

• Lance Lambert shares some Zillow data showing how higher-supplied for-sale housing markets like Texas and Florida are turning into “buyer’s markets.”

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

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