Multifamily Demand Normalizing, But Rents Will Still Climb

Apartment demand may be normalizing, but rents are nonetheless expected to continue to climb in 2022. 

New research from the National Association of Realtors notes that “even if net absorption is normalizing, absorption (demand) is still outpacing deliveries (supply) across all classes of apartments,” and higher mortgage rates and continued price acceleration this year will also push up rates.

Vacancy is tight for the sector, especially for Class B and C units, according to NAR economist Scholastica Gay Cororaton. 

“Amid elevated inflation, rents will continue to rise strongly in 2022 although at below double-digit pace,” she predicts. Cororaton notes that US Census Bureau data shows that the rental vacancy rate hit 5.6% in 2021 Q4, the lowest rate in nearly four decades.  And Costar data tracking just multifamily units estimates the rate to be closer to 4.5%

At the same time, asking rents have gone up by more than 11.2% year over year over the past 12 months, according to Costar.

And absorption remains low: quarterly absorption during Q4 2021 totaled just nearly 70 million units, one-third of the average quarterly net absorption during the first three quarters of 2021.  The early-2021 surge could be partially attributed to household formation and workers returning to the office. But, the metric “is trending towards a normal level,” Cororaton says, adding that the average quarterly absorption in 2019 was around 82,000.

In 2021, absorption nearly doubled the pace of new supply coming to market, according to the NAR, with 703,924 net apartment units absorbed, but just 378,683 delivered.

So what’s next for the sector?  Cororaton predicts absorption is likely to trend at normal levels, “but with deliveries and construction still lagging absorption, rental vacancy rates will remain tight,” which will in turn push up rents. Rent increases will likely be below the double-digit pace at a more palatable 8 to 10%, however.

“Higher interest rates in 2022 will further lead to a demand for more apartment units because higher mortgage rates will make a home purchase less affordable for nearly 1.8 million renter households headed by 25-54 years old,” Cororaton says. “There is a strong demand for affordable apartments (Class B/C), indicating opportunity for more construction to meet the needs of renter households who can afford at this price range.”