About Multifamily’s Tightening Performance Between Top, Bottom Markets

Rental growth for apartments is expected to slow to just more than 2% this year, according to CBRE, falling to its lowest level since 2010. This much is well known, but CBRE also points to a less-examined facet of this trend, which is that the gap between the top markets – generally Midwest cities with little supply growth – and bottom markets – generally Southern cities with aggressive supply growth – is narrower than usual.

Other market observers have spotted this same development. Carl Whitaker, Senior Director of Research & Analysis, RealPage, tells GlobeSt.com that he has seen the gap between top-performing and bottom-performing markets tightening in recent months.

Top quartile markets are averaging about 6% growth overall while bottom-ranking markets are averaging cuts of roughly 4%, he said.

“Almost without exception, those top performing markets are low-supply metro areas with little to no supply skewing heavily towards the Midwest, Rust Belt, and Northeast.”

Conversely, high supply markets largely concentrated in Florida. Austin, Boise, Atlanta, Phoenix, and Salt Lake City – i.e. some of the highest inventory growth markets in the nation – round out those bottom-performing areas, Whitaker said.

“Interestingly enough, the gap of about 10 ppts from top quartile to bottom quartile is still slightly larger than the pre-pandemic norm,” he said.

In 2018, top quartile markets averaged 7% growth while bottom quartile markets averaged -0.1% cuts (or a 7 ppt spread). In 2019, that same sequence was 6% growth and 1% cuts for top and bottom, respectively, or a 7 ppt spread, according to RealPage.

“From that perspective then, it appears the difference today isn’t that the top performing markets are failing to match pre-pandemic levels,” Whitaker said. “If anything, the 2023 top performers are actually in line with 2010s norms. It’s actually the depth of cuts happening in the highest-supply markets that is informing the larger spread.

“Having said that, the lion’s share of absorption in 2023 belonged to the Sun Belt and Mountain markets. About 70% of all absorption happened within that region so demand remains good-to-great in those areas. It’s just that supply has reached truly remarkable levels (as highlighted by the 50-year peak), resulting in supply outpacing demand in those areas.”

Jay Parsons, Chief Economist, RealPage, said he believes the story here appears to be normalizing solid rent growth in low-supply markets like the Midwest combined with normally hot Sun Belt markets cutting rents due to high supply.

“But the cuts haven’t been dramatic on a market level, which keeps the spread fairly narrow. However, we do have some high-supply submarkets where rents are falling more.”

Larry Connor, Founder and Managing Partner at apartment operator, The Connor Group, said that he is continuing to see 4% to 8 percent rent growth across his portfolio’s 18 markets, with properties in the Midwest and Sun Belt performing particularly well including in Columbus, Cincinnati, Indianapolis, and Louisville, as well as Miami and Tampa.

Greg Willett, First Vice President, National Director IPA Research, Institutional Property Advisors, tells GlobeSt.com that on the metro level, this year’s best performers are likely to post rent growth near the 3% mark while the weakest performers should register price cuts of 1% to 2%.

“No metro is positioned for off-the-charts momentum because the markets sidestepping the sizable wave of new supply that’s on the way tend to be areas with inherently modest economic growth,” Willett said.

“What’s perhaps most interesting to see is that the metros positioned to experience rent cuts are predicted to log only mild declines.

“Visibility into key performance metrics extends down to the neighborhood and property level. Transparency into what’s happening on a micro basis tends to prevent property owners and operators from overreacting to big-picture challenges.

“You can reduce pricing in the spots where cuts are appropriate, but you don’t need to make blanket reductions that would impact submarkets and individual projects where occupancy is holding up and the impact of new deliveries is reasonably tame.”

David Reynolds, President of Investment Management, Mill Creek Residential, tells GlobeSt.com that a mild economic slowdown in 2024 with no net-job losses will modestly constrain overall rental growth for the year.

He said for Mill Creek’s 30 target markets, located in the “smile” of the United States, 2024 revenue growth for new and renewal leases will be ~2.7%, with the spread between the strongest and weakest market rent growth projections to be ~600 basis points.

“Additionally, we expect the supply/demand fundamentals will continue to improve as deliveries peak in late 2024/early 2025, with greatly reduced starts in 2024 through 2026,” Reynolds said.

“Demand for multifamily homes will remain strong in 2024 through 2026, approximating 380,000 annually for the first two years as the lack of home ownership affordability drives a larger percentage of households to rental housing. Following 2025, supply will no longer keep pace with absorption and fundamentals will further strengthen.”

Jay Lybik, national director of multifamily analytics at CoStar Group, tells GlobeSt.com that in the two years before the pandemic, the average rent growth difference between fast-growing Sun Belt markets and markets in the Midwest was 80 basis points. For the Sun Belt vs. Northeast markets, the spread was larger at 130 basis points.

However, CoStar’s rent growth forecast for 2024 shows an average delta of 230 basis points for the Midwest vs. the Sun Belt and 200 basis points difference between Northeast Markets and the Sun Belt.

“The more balanced Midwest and Northeast markets will continue to see stronger rent growth in 2024 than the Sun Belt,” Lybik said.

“Pre-pandemic, the nation was fairly well balanced in terms of supply and demand but that won’t be the case until the end of 2025 at the earliest,” he said.

Sun Belt markets will still see 60,000 more completions in 2024 than in 2019 while the rest of the nation will already be back to pre-pandemic supply levels this year.

“Thus, the difference in rent growth performance for 2024 will remain strongly in the favor of non-Sun Belt markets and that difference will be meaningful compared to historical averages,” according to Lybik.

Another issue for some markets is the slowdown in multifamily development activity, Yardi Matrix’s Doug Ressler says.

At a national level, he said that new construction exceeded expectations in 2023. But at a market level, there have been sizable declines. Full-year 2022 saw 678,771 units start construction, with 50% of starts contained in just 22 markets. For the first three quarters of 2023, 18 of these markets saw starts decline compared to the same period in 2022.

“For some of these markets, the decline has been particularly large,” Ressler said.

Indianapolis, Salt Lake City, Austin, and Seattle have all seen starts decline by more than 40%, while Suburban Atlanta, the Southwest Florida Coast, Suburban Dallas, and Denver have seen starts decline by more than 25%.