The Factors Weighing Down Multifamily Rents and Profit Margins

It’s going to be another challenging year for multifamily owners and operators. Many factors will converge and control what owners must do to survive the business. Frequently, that will mean lower rental growth and increased operating expense, leading to narrower margins. Not only will that affect return, but the attractiveness to lenders for refinancing.

Moody’s estimate for rent growth in the U.S. as of the second quarter of 2024 is low-to-mid-1% range. The gap between asking and effective rents on average remains above $90. That’s been true for three quarters running now. That is an expression of the highest concession levels in Moody’s tracking history. Whether lowering average monthly rent or providing rent-free periods in negotiations.

Over-supply has been the most important driving factor on the rent front. There has been explosive growth in the number of housing units, particularly multifamily. In June 2024, private-owned housing completions had increased sequentially by 10.4% to a seasonally adjusted annual rate of 1.71 million units. That includes both single-family and five-or-more-unit multi-family. The latter represented the bulk of the construction at 656,000 units. That was an increase of 26.2% month over month or 40.2% year over year. That’s the highest seasonally adjusted rate since September 1974.

As GlobeSt.com has previously reported, the increase in units hasn’t been uniform in distribution across the country. Construction chased demographic movements of businesses and people, largely headed south and west. The effects of increased supply, therefore, are unevenly concentrated. Also, as Moody’s notes, there was a tremendous fall-off in housing completions during and immediately after the Global Financial Crisis. Building scale eventually returned; however, that still left a cumulative shortage of 1.9 million homes that have not yet been recovered.

Then there are expenses, as Moody’s separately reported. Insurance has been one area of sharp growth. In some markets, year-over-year insurance growth has shot up to more than 17%. On average, property insurance has exhibited a 7.6% increase since 2017.

Outside of that, the three major median growth expense areas from 2022 to 2023 have been payroll and benefits, utilities, and repairs and maintenance. That is consistent across each revenue quartile. On a per-unit basis, payroll and benefits are up about $75; utilities, $55, and repairs and maintenance, about $35, for the lowest quartile. For the highest quartile, payroll and benefits were near $120 per unit. Both utilities and repair and maintenance were up about $95 per unit.

As a result, multifamily property owners are being squeezed from the top in terms of the ability to increase rents and from the bottom through operational expenses.