With apartment rents clearly decelerating now, the market is waiting to see where the bottom could be.
Greg Willett, First Vice President, National Director IPA Research, tells GlobeSt.com that his base case scenario calls for overall apartment rent growth of 3.1 percent during 2023.
“That performance lines up with the typical growth seen in the pre-pandemic period after pricing went on a wild ride in 2020 to 2022,” he said.
“While there have been month-to-month rent cuts in some places of late, seasonality certainly comes into play in those figures. Moderate renter demand seems likely to kick back in once we get to prime leasing season, allowing property owners and operators to feel a little more confident in their pricing strategies.”
Willett said that most of 2023’s rent growth is expected to occur in the middle-market Class B stock, while a little pricing power also could register in Class C communities.
There are bigger challenges in the luxury Class A space, he said.
“With so much new supply coming on stream, the newest deliveries probably will experience slow lease-up in most metros, pointing toward a significant upturn in the use of rent concessions,” according to Willett.
“Discounts also could emerge in stabilized top-tier developments, as operators try to hang onto existing renters tempted to move into the latest additions. Lots of local markets probably will experience essentially flat rents in the best properties, and price backtracking wouldn’t be surprising in select spots.”
Suburban B Stock Lifting Sector
Jay Parsons, senior vice president, chief economist, RealPage, tells GlobeSt.com that he expects to see more divergent rent movement by asset class and submarket in 2023 – with Class A urban impacted the most by this big wave of lease-ups.
“We’ve already seen a couple of big markets turn negative on rents YoY (Vegas and Phoenix), and others should soon join them,” Parsons said.
“Our view right now is national rent growth remains positive in 2023 but lifted by suburban Class B – which represents the bulk of apartment stock and is mostly insulated from supply given significantly lower rents.
“In many cases, it’d take 5 to 6 months’ worth of “free rent” to bring lease-up rents on par with Class B.”
Last Year Closed on the Downside
Yardi Matrix points out that multifamily asking rent growth recorded its second-best year this century in 2022, though it finished the year on the downside due to weakening demand and robust supply growth that has occupancy rates sinking.
Andrew Semmes, senior research analyst, Yardi Matrix, tells GlobeSt.com that despite headwinds, the market has positive drivers.
Yardi Matrix has revised downward its apartment rent forecast for 2023 to 3.1% from 3.5% and expects to see all that growth in the first two to three quarters of the year.
Job destruction and a recession beginning in the third or fourth quarter of next year is likely, but it will not be particularly deep or lengthy, it said.
“At that point, we will likely start to see broad declines or stagnation in average asking rents, but not enough to offset the gains that we expect in the first half of 2023,” Semmes said.
In 2023, we expect the market to behave in a more traditional manner, at least nationally.
“Asking rents should remain flat or fall slightly through the spring when growth typically is strongest,” he said. “Then rents will rise moderately, though nowhere near the outsize levels of the last two years.
“Our outlook is colored by the demand-supply equation. Demand for apartments is moderating from 2021 record levels as the economy cools, excess household savings are depleted, affordability is stretched, and the post-pandemic migration is played out.”
Meanwhile, Semmes said, 2023 should be a strong year for new supply. More than 400,000 units are expected to come online in 2023.
Deliveries will be concentrated in markets with high population growth such as Austin, Nashville, Charlotte, and Orlando, which to some degree will dampen the increases in rent growth that come with high in-migration.