Multifamily Outlook Brightens While Office Questions Linger

The national multifamily vacancy rate has decreased by 20 basis points to 5.6% during the third quarter. Considering the record level of apartment completions over the past few years, this decline is surprising but welcome news, said Marcus & Millichap national director of research and advisory services John Chang.

Nearly 163,000 new units came to market during the third quarter, and total apartment absorption for the quarter was more than 191,000 units. “That’s the strongest quarter we’ve seen since the second and third quarters of 2021 when we had the post-COVID bounce,” said Chang. The strong upward trend in apartment absorption reflects a continued housing shortage in the United States, as well as increasing confidence in household formation as inflation comes back under control and employment remains strong, he said.

Apartment completions have been relatively concentrated across the Sun Belt in Texas, Florida, Atlanta, Nashville, Phoenix and Charlotte. In those markets, absorption has been strong, but it also has been strong in metros with limited construction, including Washington, D.C.; Las Vegas; Portland, Oregon; Sacramento; Detroit; and San Francisco, noted Chang.

“Those are some of the markets generating outsized vacancy compression,” he said. “We anticipate multifamily housing demand will keep pace with construction in 2025 so that trend should hold, at least on a macro basis.” The story for the office sector is different, however. Office absorption was just more than 26 million square feet, which was enough to bring the office vacancy rate down by 20 basis points to 17%. This is the strongest quarterly absorption the office sector has recorded since 2021.

“It falls on the heels of about 10.6 million square feet of absorption in the second quarter, so we are seeing some office space demand momentum,” said Chang.

About 50 million square feet of office is expected to be added for all of 2024, which is the slowest pace of construction since 2012, and even though office vacancy is lower, it’s too soon to say the market has turned the corner, said Chang.

“I think the jury is still out on exactly what the use case for office will be in 2025 and beyond,” he said. “We continue to see increased pressure to return to the office in the financial services sector, and we’re beginning to see it in the tech sector, but I’m still waiting for that clear change of psyche in the marketplace that would lead to broader utilization of office space.” Demand in the office space appears to be bifurcated, with well-performing offices at nearly 100% occupied, while poorly performing buildings are completely vacant.

“For investors, it’s really a hit-and-miss scenario,” said Chang. “From what I’m hearing, office debt availability remains very tight, so for multifamily investors, the outlook appears to be improving, and the office outlook is also improving, but there’s still a lot of questions to be answered.”