Apartment Owners Prioritizing Occupancy Over Rent

Apartment demand rebounded in 2023 after a dreadful year prior, especially during the second half of it, Cushman & Wakefield said.

Therefore, “apartment operators today are prioritizing occupancy over rent,” its economist, Sam Tenanbaum said.

There are 800,000 apartment homes currently under construction, which is about 5% of the country’s inventory, “so supply-side economics are expected to be a key theme for the next few years,” he said.

Cushman & Wakefield’s most recent multifamily report said that despite an unprecedented supply wave, the multifamily market is enjoying a solid year, characterized by healthy rental demand and positive rent growth.

Looking at vacancy rates alone, which steadily increased from an all-time low of 5.0% in 2021 to 7.8% as of Q3 2023, “would be suggestive of deteriorating market conditions, but it also masks favorable demand-side trends that have reemerged this year,” the report said.

The multifamily sector was posting record demand when first coming out of the pandemic, so it was destined to cool. Notably, in 2021, the U.S. economy absorbed 539,000 apartment units, more than double any year on record, the firm said.

Construction starts are down 60% over the past year, especially in hot regions such as the Sunbelt.

“That tells us that oversupply challenges should be short-lived,” according to Tenenbaum.

Tenenbaum said the high cost to buy a home remains completely disconnected from the rental market so he expects new households to be more incentivized to rent.

Cushman’s report said the economics of renting versus owning have never been more favorable as it is now $400 a month more expensive for a 30-year, fixed mortgage than the average rent.

“If all costs of homeownership were included, the monthly cost savings of renting vs. owning would be closer to $1,000 on average,” the report contended.

Cushman & Wakefield said the current trajectory of decreasing rental housing costs suggests a modest recessionary scenario in 2024, “but deviations from that baseline could swing rents in either direction.”

National rent growth is still increasing but has decelerated markedly from 13.4% in 2021 to 4.7% in 2022 and now 1.3% in Q3 2023.

“In our base case, we expect the softness to continue with multifamily rents declining by 2.3% in 2024,” Cushman & Wakefield said.

“This would be the first year that rents declined since 2009 when they fell 3.4%. But as new construction deliveries bottom out and economic growth accelerates in 2025, rent growth will resume, climbing by 1.9% before popping another 5.1% in 2026.”