Demand in These Apartment Markets Top Pre-Pandemic Norms

Twelve primary markets outperformed apartment demand in Q4 at a pace greater than pre-pandemic norms, according to a report from RealPage.

Most were in the Sun Belt, with its solid population growth, household formation, and demand for “all types of housing,” according to RealPage’s Kim O’Brien.

Here’s the list that follows best-performing Phoenix: Houston, Atlanta, Minneapolis, Newark, Raleigh/Durham, Orlando, Detroit, Austin, Chicago, Charlotte, and Salt Lake City.

These weren’t the only strong performers though, as the quarter overall surpassed the long-term average, according to data from RealPage Market Analytics.

Phoenix powered ahead based on its absorption of nearly 4,300 units in the last three months of the year.

Ritesh Patel, Chief Investment Officer of Virtú Investments, disagrees about Phoenix, telling GlobeSt.com, “Its rapid growth in recent years, current and forthcoming high supply levels, and evolving supply/demand dynamics make it one of our less preferred markets for investment.”

Markets that averaged net move-outs in Q4 during the 2010-2019 timeframe include Atlanta, Minneapolis, Detroit, and Chicago – a market still seeing net move-outs in Q4 2023.

Diana Pittro, executive vice president of RMK Management Corp., one of the Midwest’s leading property management firms, tells GlobeSt.com that Chicago-area rental growth in Q4 was minimal compared to the first half of 2023, but she is optimistic about Q1 2024 based on what the firm is seeing at properties in its management portfolio.

“During the last two quarters of 2023, downtown Chicago properties offered more concessions than normal overall, and then certain pockets of the city had an oversupply of apartments, which led to more concessions being offered in those areas,” she said. “But so far this year, we’re seeing improvements in traffic, fewer concessions, and more renewals as well as new leases at all of our properties.”

Roberto Casas, Senior Managing Director, Multi-Housing Group Leader with JLL Capital Markets, said that JLL data show the top five markets for rent growth in this current cycle are in gateway markets, indicating the broader demand resilience of those markets.

“A reason for this is that gateway markets, unlike other high growth markets, experienced limited new development post-COVID, resulting in a lower supply of multi-housing properties,” he said.

The top five markets in order include Chicago, Boston, D.C., New York City and Philadelphia. Chicago, Boston, and D.C. are the only markets that are currently above 2% YoY average trade-outs.

Only a handful of apartment markets logged fourth-quarter demand in 2023 that came in below pre-COVID averages, according to the report. “These were mostly West region markets and metros lacking notable job gains or apartment supply in the past five years,” O’Brien said.

San Diego had the worst demand in Q4. O’Brien noted that although Los Angeles saw big job growth in the past five years, that wasn’t enough to keep up with big completion volumes and it could see some demand struggles in 2024.

Mike Wolfson, Managing Director of Multifamily Capital Markets Research at Newmark, tells GlobeSt.com that among the myriad factors shaping growing demand in the multifamily market, the consequential impact of single-family market dynamics is arguably most notable.

“The scarcity of available homes for sale is a prime driver of robust multifamily market demand, as insufficient housing inventory poses a challenge for would-be buyers, sparking bidding wars that raise prices and limit options,” Wolfson said.

“Despite a strong consumer spending environment, the lack of optionality fueled by constrained supply and escalating prices is restricting investment in the single-family market. At the same time, historically low personal savings rates are benefitting the multifamily housing sector, directing potential buyers toward rental properties.”

Wolfson said the gap between housing supply and demand is exacerbated further by rising interest rates, prompting otherwise interested prospects to reassess the viability of entering the housing market.

“Ongoing migration trends that have been unfolding over several years are also contributing to significant multifamily market demand, as newcomers to a market will often opt to rent for a period of time before even considering homeownership,” he said.

Kyle Scheiner, Partner, Romer Debbas, tells GlobeSt.com that the markets that performed better in Q4 of 2023 are large areas that picked up residents due to remote work capabilities during the pandemic.

“Many of these new residents desire comparable amenities from the cities they left while enjoying cheaper costs of living and more space,” Scheiner said.

“The areas now struggling with falling apartment demand will soon grapple with the reality that failing policies and questionable local economic strategies have drained their tax bases and could lead to more harsh economic consequences for unit owners and landlords unless the issues are addressed, promptly.”

Yardi Matrix said the multifamily market is decelerating nationally and is in for a difficult year – but not everywhere.

“We continue to see a market rotation occurring,” Yardi Matrix’s Doug Ressler tells GlobeSt.com.

“Sun Belt metros are decelerating at the upper end, driven by heavy supply additions, and Midwest, Northeast, Small Southern, and some Mountain metros are outperforming.”

He said the market rotation is occurring due to affordability in the wake of rapid rent increases and slowing domestic migration.

Additionally, Ressler said that construction financing is in short supply, and deliveries could be significantly reduced in 2026-2028 and the supply shortage of U.S. housing is likely to last 5 to 10 years, supporting continued rent growth and capital appreciation.