In this edition, we’ll explore the state of the US multifamily market and highlight some key trends in today's environment. Understanding the US multifamily market and how it effects other markets can provide insights into rental demand, vacancy rates, and rent trends, which are fundamental factors when evaluating real estate investments.
The US multifamily sales market came to a standstill in 2023 as interest rates increased and market participants became concerned about property valuations. According to the Multi-Family National Report, published by CoStar in June 2024, there was $263 billion of multifamily sales volume in 2021 and only $85.4 billion of sales volume in 2023. Market participants are now seeking purchases around a 6% cap rate instead of a sub-5% cap rate, and buyers and sellers alike are delaying commitments in anticipation of lower interest rates, which is causing transactions to stall. The report projects multifamily sales to be $30 billion by mid-year 2024, potentially marking it the most sluggish start since 2012.
Source: Costar June 2024 United States Multi-Family National Report
In addition to sluggish sales, national rent growth has slowed. The report published by CoStar indicates that year-over-year multifamily rent growth has pulled back from 9.4% to a mere 1.1%. Most new supply additions are concentrated in the Class A market, which recorded rent growth of -0.1%, compared to Class B/C apartments experiencing steady rent growth at 1.5% to 2%. Investors believe that slower rent growth will persist in the forthcoming quarters, further diminishing the appeal of negative leverage beyond the first year of investment.
Renters have shown remarkable resilience, and delinquency rates remain relatively low compared to the office, retail, and hospitality sectors. The rise in interest rates has widened the gap between the cost to own versus rent, making it more challenging for people to buy houses. This has driven increased rental demand, especially among people in their 20s and 30s. There is also a secular change in the perception of renting, with many Americans delaying adulthood milestones, staying in apartments longer, and prioritizing the importance of amenities, lifestyle, and location.
The impact of this resilient demand is evident in the US multifamily absorption numbers. Absorption refers to the rate at which available rental units are rented or leased during a specific period. According to the Multi-Family National Report, the absorption of multifamily units surged to 116,000 during 1Q24, a notable improvement over the preceding quarter's 69,000 units, and the highest absorption rate since the third quarter of 2021. It is projected that absorption could exceed 150,000 units by mid-year 2024, which would be the first-time absorption has matched 2021 levels.
As highlighted in a report from CoStar, there are currently 827,887 multifamily units under construction nationally. In the first quarter of 2024, 153,000 units were completed, with an estimated 164,000 more scheduled for delivery by the end of the second quarter. The influx of new supply in certain markets is creating challenges, increasing vacancies, and lowering rent growth. The report projects the national vacancy rate to rise to 7.9%, up from the record low of 4.8% in the third quarter of 2021.
High-growth markets, especially in the Sunbelt, are seeing significant impacts on vacancies due to peak supply deliveries. For example, in Austin, Texas, the vacancy rate climbed from 9.8% in 1Q23 to 14.4% by 1Q24. Similarly, in Raleigh, NC, vacancies increased from 9.4% to 12.4% during the same period.
In contrast, Midwest and Northeast markets have experienced only moderate supply additions over the past two years, leading to a more balanced multifamily sector in these regions. Projected deliveries in the Midwest for 2024 are only 11,000 units higher than in 2019, contributing to favorable rent growth and vacancy levels.
According to a recent report by CoStar, nationally, new construction and deliveries are projected to decline significantly in 2026 and 2027. Supply follows a cyclical pattern and is relatively predictable, with starts and developments expected to decrease by 40%-50% in major markets. As supply and demand imbalances appear to diminish, the national vacancy rate is forecasted to ease in the second half of 2024 and stabilize around 7.9%.
The US multifamily market has not experienced widespread distress as lenders have shown flexibility and owners remain with positive equity. Although cap rates have seen slight increases, they have not risen as sharply as interest rates, leaving property owners with substantial equity in their investments. With the exception of sponsors who were over-leveraged and overly aggressive on acquisitions during the Covid peak, the market is anticipated to enter a stabilization phase, with notable performance variations among different markets.
According to the reports published by CoStar, rents are expected to accelerate for the first time since 2021, with growth increasing from the current 1.1% to 2.7% by the end of this year. As interest rates rise and rents continue to climb, especially in Class B/C multifamily properties, many Americans are looking for affordable housing options and aiming to become homeowners.
It’s important for us to understand and monitor the multifamily market as it provides key insights into broader housing trends that directly impact demand for affordable housing. By staying informed about the multifamily market, we can better anticipate shifts in rental demand and vacancy rates, positioning ourselves to meet the needs of those seeking affordable housing.
Stay tuned for future editions where we’ll explore more aspects of real estate investing. As always, feel free to reach out with any questions.
KKR Bullish on Multifamily
Signaling a positive outlook on the multifamily sector, one of the nations largest players, KKR, recently acquired a portfolio of 18 multifamily assets for approximately $2.1 billion. The recently built, Class A portfolio consists of over 5,200 units concentrated primarily in growing coastal and sunbelt markets including California, Washington, Florida, Texas, Georgia and North Carolina, Colorado and New Jersey.
Sources: https://www.multihousingnews.com/kkr-purchases-2-1b-multifamily-portfolio/
2024 -Multi-FamilyNationalReport. CoStar.
2024 - Multi-FamilyCapitalMarketsReport. CoStar.
Negative Leverage: Negative leverage occurs when the cost of borrowing exceeds the return on investment. In real estate, this means that the interest rate on the debt used to finance a property is higher than the property's yield or capitalization rate. As a result, instead of enhancing returns, the use of debt reduces the overall profitability of the investment. This can lead to financial strain as the property generates insufficient income to cover the cost of the borrowed funds, ultimately reducing the investor's equity and potential returns.
Net Absorption Rate: This is a metric used in real estate to measure the change in the number of occupied units within a particular market over a specific period. It is calculated by taking the total number of units that were newly occupied during the period and subtracting the number of units that became vacant. The net absorption rate provides insight into the demand for rental properties in the market, indicating whether more units are being leased than are being vacated (positive net absorption) or vice versa (negative net absorption). This metric is crucial for understanding market dynamics and predicting future trends in rental demand and supply.
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