The Problem With Taking a Myopic View of Multifamily

Recent studies of the multifamily market tend to report that rents are falling in many areas and vacancies are slightly higher. A new study from YardiMatrix shows much the same thing. But it says looking at the sector from a short-term perspective distorts the picture, producing “a myopic result.”

“Rent declines in some markets in recent months pale when viewed next to the growth since the start of the pandemic,” the report stated. Noting that the average U.S. asking rent fell $6 to $1,713 in November, it pointed out that this level is 23.5% higher than it was when Covid started spreading in March 2020.

“Even if rent growth remains muted, multifamily performance should stay strong because demand for housing exceeds supply,” the report predicted. “The uptick in deliveries slated for the next two years will create some balance, but unless supply growth is sustained, the market will soon come to another period of imbalance.”

The current situation, where average November rents are $12 below this summer’s all-time high, represents the market “hunkering down” for the winter. Weak near-term rent growth due to inflation, the loosening job market and a surge in deliveries in some markets, and deteriorating values and capital markets liquidity resulting from high interest rates are all at play. Uncertainty about interest rates and valuations has also led to paralysis in multifamily property sales and mortgage activity, the report said.

The highest year-over-year rent growth was in the Northeast and Midwest, led by New York City (6.2%), Kansas City (4%), New Jersey (4%), Columbus (3.4%) and Chicago (3.2%). However, other metros are seeing falling rents, especially in the Sun Belt which has had a high number of deliveries. Seven of the 30 top markets Yardi studies saw rents dip by 3% or more, year over year.

The data shows the highest annual rent growth occurred in the renter-by-necessity asset class, defined as including individuals like office workers and teachers as well as blue-collar workers who “may barely meet rent demands and likely pay distortional share of income toward rent.” On a month-by-month basis, rents fell 0.2% for this cohort in November. They fell more steeply – 0.4% — for households where renting was a “lifestyle” choice. Monthly rent gains were noted in Kansas City (0.6%), New York (0.5%) and Houston (0.4%). Most other metros were unchanged or declined. “Declines are concentrated in areas that have had an influx of supply,” the report noted.

As asking rents drop, so does renewal rent growth. Renewal rents in September rose 6% nationally year-over-year but were down 40 basis points from the prior month. The national lease renewal rate averaged 65.2% in September, having ranged between 64.7% and 66% for the past five months. Renewals were highest in New Jersey and lowest in Los Angeles.

Over the period March 2020 to October 2023, low-cost and fast-growing markets, especially in the South, as well as second-home communities were most likely to see the highest increases in average asking rents. Suburban satellite markets like Central New Jersey, the Inland Empire, suburban Atlanta, and Allentown also experienced rapid rent increases. Large or expensive markets on both coasts saw the least growth, though it remained positive in most urban areas.

Demand for single-family rentals remained robust due to high mortgage rates that curtailed home sales. Occupancy rates have steadied at 95.9% and are likely to remain high. Annual rent growth slipped $8 in November to $2,115, or 30 basis points. “Rent growth is entirely concentrated in the renter by necessity segment, which is up 3.2% year over year,” the report stated. “A record 58,000 SFR properties are under construction.”