Two Factors That Drive Regional Multifamily Differences

Moody’s Analytics CRE released a year-to-date analysis of multifamily effective revenue per unit performance in 82 top markets. There were some significant differences by region, raising the question of what was driving the differences.

The effective revenue per unit definition is the occupancy rate multiplied by the effective rent in dollars per unit. Out of the top five, three were from the Southern Atlantic region, one from the West, and one from the Midwest. Their year-to-date effective revenue per unit changes ran from 3.1% (Lexington, KY) to 5.2% (Columbia, SC).

The bottom five comprised two from the Northeast, one Western, one Southwestern, and one Southern Atlantic. They ran from -2.4% (Long Island, NY) to -3.6% (Fairfield County, CT). And yet, the Northeastern region had the largest increase in effective revenue, being 50 basis points above the national average, which was a 0.16% drop, likely to stay flat next year due to “a banner year for completions.”

Vacancies are making a big difference. “The Northeastern Region saw the largest decline in its vacancy rate (-10 bps) and the second-fastest increase in effective rent growth (+24 bps),” Moody’s wrote. “Although the Southwestern Region reported the strongest effective rent growth (+69 bps) its performance was hindered by a vacancy rate that increased the most (+50 bps) among the five regions. Conversely, only the Western Region saw the cumulative change in effective rents end in negative territory (-33 bps) despite only having a slight uptick in its vacancy rate (+10 bps).”

In the top five metros, tightening vacancies made a big difference. Wichita, Kansas had 3.5% growth. Only three-quarters owed to higher rents. The remaining 25% was an issue of tightening vacancies, and improvement of 90 basis points.

The top five metros also had population growth significantly higher than average, which helps explain vacancy tightening. “Migration patterns out of the Northeastern Region, for example, that have begun in earnest since the onset of the pandemic to lower cost areas with more favorable tax policies, warmer weather, etc. have benefited multifamily investments in metros such as Columbia, Chattanooga, and Tacoma,” they wrote.

Increased population growth without enough added inventory to offset demand will mean a tighter market and a resulting increase in pricing.

The note about a banner year for completions likely means a brake on what is happening in some of the hottest markets. These are the metros where some of the largest amount of inventory is being constructed, as makes sense.