Multifamily Momentum Trends Up on Lower Debt Costs, Higher Cap Rates

Momentum in the multifamily market is trending up and is likely to continue thanks to lower debt costs and higher cap rates. Many buyers have been on the sidelines waiting out financing hurdles and softer fundamentals, and positive trends should start to loosen that backlog, said Marcus & Millichap in its third-quarter multifamily national report.

The average multifamily cap rate for trades between July 2023 and June 2024 rose to 5.8%, a 110 basis point increase from 2022’s all-time low. That is the highest cap rate recording since 2014. At the same time, sale prices are stabilizing as reduced financing uncertainty is helping buyers and sellers agree to terms.

Vacancy remained flat across the country for the first half of 2024 after increasing by 90 bps last year. Primary markets have had the most stable vacancy over the past year, particularly in downtown areas. Institutional-level activity also appears to be returning, with dollar volume rising in this segment in July and August.

Many locations are facing mild supply pressure, especially outside Sun Belt markets, the report said. Rent growth in markets including Chicago, Cincinnati, Cleveland, Milwaukee, Pittsburgh and St. Louis benefitted from inventory expansion below 2%.

The multifamily sector has experienced net absorption of nearly 260,000 apartments during the first two quarters of this year, exceeding the entire prior year’s absorption by 35,000 units. Rising household creation and cooling inflationary pressure held national vacancy at 5.8% to start the second half of 2024, according to the report. However, the overall midyear rate stayed 40 bps above the long-term second-quarter average, as historic construction has counterbalanced strong demand.

With about 1 million units underway across the country, supply pressure is expected to remain a near-term headwind for vacancy. However, multifamily project starts fell by more than 18 percent year over year in July and permits decreased by 15 percent, signaling development has likely peaked.

Operators have increasingly offered discounts to combat competition, pushing the share of apartments offering concessions to 14.1 percent in August 2024, up more than 500 bps year over year. Concession activity has leveled out among Class A properties after peaking in March, but Class B and C apartments continue to offer discounts, said the report.

Momentum in the market pushed annual rents 4% higher among lease extensions, compared with a 0.8% drop for new tenants. Renters are choosing to stay put as first-time homeownership remains difficult. The share of US households that can qualify for a median-priced home loan from Freddie Mac fell to just 26 percent in the second quarter of 2024, compared with a trailing-decade average of roughly 46 percent, said the report. The apartment renewal conversion rate hit 54.9 percent in August 2024, increasing by 150 bps year over year.