Apartment Demand and New Lease Rent Growth on the Rebound

The multifamily sector has been a growing disappointment. Not that it was expected to be otherwise. Interest rates up, consumers beset with higher prices and growing concerns over potential layoffs. Companies wondering how close a recession is. Transaction volumes have been down and rent growth slowed. Refinancing properties is tight and expensive.

But there’s some good news for owners and operators, says RealPage. Net apartment demand has recovered and is once again positive in the first quarter of 2023.

“The U.S. apartment market added 19,243 net new renters in the first three months of 2023, according to 1st quarter data from RealPage Market Analytics,” the company wrote. “That marked an improvement over 2022, when net absorption registered at -114,000 units despite strong job growth across the country.”

However, the good news isn’t unqualified. This was “still the softest 1st quarter since 2013; and furthermore, demand fell short of the 95,237 new units completing concurrently.”

Also, having positive net absorption means in this last quarter and doesn’t reverse the three previous quarters of negative absorption. So, occupancies continue to slide, but more slowly. “Occupancy peaked back at 97.6% in February 2022 and had plunged 2.7 percentage points by December. But since calendar 2022, occupancy inched back only another 0.2 percentage points, coming in at 94.7% in March, matching the pre-pandemic decade average,” they wrote.

There is a rent growth parallel as well—another case of good news, could be better, could be worse. “In March, same-store effective asking rents for new lease signers increased 0.3%,” RealPage wrote. “While that was the largest month-over-month increase since August, it’s also only half the average increase seen during the month of March over the last decade. Year-over-year, effective asking rents were up 3.9% — the first time below 4% since April 2021.”

“The 1st quarter numbers are in line with our forecast that demand would improve in 2023, but what really matters for apartment operators is what happens in the spring and summer months,” the article quoted RealPage Senior Vice President and Chief Economist Jay Parsons. “That’s the traditionally busy leasing season, and with so much new supply on the way this year, these upcoming months are critical for apartment owners and managers.”

The immediate future comes down to two major categories of factors. One is the economy, and there’s likely at least another interest rate hike in May. The other is supply. As RealPage noted, apartment construction at the end of March was 1,026,941 units, the most in 50 years. Half are scheduled for this year, although some will likely get delayed until 2024. But much of that is in and around urban cores and at top price points.

“That’s going to make for a very competitive leasing environment at the top of the market, but even with generous concessions, it’s going to be tough for these new projects to attract renters from much cheaper Class B or Class C properties,” said RealPage Senior Director of Research and Analysis Carl Whitaker.