Industrial, Multifamily, Self Storage Stare Down Oversupply Issues

Oversupply was the theme in Marcus & Millichap’s recent news video, which provided a Q3 update on industrial, multifamily housing, and self storage asset classes.

As of the third quarter, the industrial vacancy rate nationally was 4.8%, which is up 120 basis points from a year prior with annual rent growth of 9.5%.

Although absorption on a national level has been positive every quarter since 2010, it has tapered over the course of the last year and rent growth has followed suit, according to John Chang, National Director of Research Director and Advisory Services, Marcus & Millichap.

Construction levels continue at a record pace with 400 million square feet expected to come online in 2023. That said, about half of the completions in 2023 will be in nine metros: Dallas, Riverside/San Bernardino, Chicago, Atlanta, Houston, Phoenix, Indianapolis, Philadelphia, and Charlotte.

Chang advised monitoring local construction and watching for rising vacancy rates.

“Overall, demand for industrial space should remain positive in 2024, but much will depend on whether the Fed successfully achieves a soft landing,” Chang said.

Apartment properties also face significant supply risk in 2024, according to Marcus & Millichap.

The multifamily vacancy rate for Q3 was 5.4%, up 130 basis points from the third quarter last year.

Rent growth on a national level tapered significantly over the last year with effective rents up just 1.7% from the third quarter of 2022.

Apartment demand has been positive every quarter this year, but it has fallen short of the record pace of deliveries, about 420,000 new units will be completed in 2023.

“We do expect construction to rise even further in 2024, which will continue to place upward pressure on vacancy rates in most markets,” Chang said.

“Investors should monitor these trends on a local level, but investors should also look more deeply into the pipeline of development beyond 2024. At this point, it looks like the pace of construction should thin significantly in 2025 and beyond. As a result, even markets with a lot of new units coming online in 2023 and 2024 could ultimately outperform if the economic drivers in that market, particularly job creation, remain robust.”

Self storage could also face new supply challenges, Chang said.

As of the third quarter, the average national self-storage vacancy rate was 8.6%, up 110 basis points on a year-over-year basis while street rents were down 4.5% compared to last year.

“Storage rents are one of the factors that are complicating the 2024 investment forecast,” he said. “Street rates have fallen, but the effective rents for existing tenants remain relatively stable. This is tied to the ECRI, or the existing customer rent increases.”

The majority of self-storage operators have been reducing the rates at which they market their units – the street rates. Then, they gradually raise the rates over time to get back to their target effective rate.

“Unlike apartments where there may be some concessions, such as one month free on a 12-month lease, self-storage isn’t tied to an extended lease,” Chang said.

“So, storage operators can migrate rents up to their target rate after the tenant has moved in. That said, rising vacancy rates could become a significant headwind for the sector. An influx of self-storage development is in the pipeline, but the big question will be whether all the development will actually be finished.”

Because of the higher cost of capital and construction costs, a lot of the storage projects could be shelved, but investors will still need to monitor their local construction risk in 2024 and beyond, he said.