Apartment Renters are Absorbing the High Number of Units Coming to Market

Renters appear to be riding the record-breaking wave of apartments that came to market in the first half of 2023. They absorbed 98,249 units, almost four times as many as in the first half of 2022, with demand likely to accelerate through mid-2024. The vast bulk occurred in the second quarter, according to Newmark’s U.S. multifamily capital markets report for 2Q 2023.  

In 1H 2023, 198,806 rental units were delivered, indicating a potential 51% increase over 2022 for the full year. Even higher numbers are expected through 2025. However, Newmark cautioned that lack of capital could slow the number of new units delivered in 2026-2028.

Meanwhile, it projects that the median market’s inventory will rise by 3.2% over the next 12 months, compared to 2% in the previous 12 months. Inventory will grow by 5% or more in 28 markets, compared to 10 for the prior year.

If history is a guide, Newmark noted, it could take several years for markets to absorb the new supply coming on line. Some markets are likely to move faster than others, including 40 out of the 50 top markets. Indeed, Austin, Charlotte, Raleigh-Durham and Phoenix could absorb the increase two or three times faster than historical norms in 2023 and 2025.

At the same time, the flood of new apartments now available has pushed up national vacancy rates 210 bps to 5.3%, a level not seen since 2014. Again, there were variations in the response. Midwest and major markets experienced less vacancy, while others saw much higher rates including Memphis, Greensboro and San Antonio.

“For the first time in three quarters, multifamily experienced positive effective rent growth quarter-over-quarter in the second quarter of 2023. Nevertheless, year-over-year effective rent growth continued to slow and is now below the long-term average,” the report noted. Several Midwestern markets bucked the trend, however, and saw rent growth.

So did lower-income communities. “As the most affordable option, Class C appeals to the stickiest tenants, who are ‘renters by necessity.’ Coupled with less direct competition, Class C properties have experienced the largest rent growth gains, both year over year and since Covid,” Newmark reported.

One challenge landlords face is a hike in expenses, largely because of a 28.6% leap in insurance costs, with Florida especially hard hit. Other expenses are also increasing, such as management costs and property taxes.

Despite these expenses, multifamily net operating income is expected to rise slightly above its long-term growth average of 2.3% to 2.7% in 2027, reversing a 7.7% drop from 2022 to 2023.