Healthy Demand Lifts Multifamily Rents But Supply Growth Raises Concerns

The multifamily market remains steady, but “robust” supply growth raises concern for the near future, analysts say.

Yardi Matrix, Santa Barbara, Calif., said average U.S. apartment rents rose $3 in July to a record high $1,409. Rents are up $41 or three percent year-to-date, in line with growth figures during the same period in recent years.

“That’s encouraging because it once again shows that the expansion has not run out of steam despite headwinds of increased supply and affordability issues,” Yardi Matrix’s Multifamily National Report said.

Peter Muoio, Chief Economist with Ten-X Commercial, Irvine, Calif., agreed multifamily rental demand remains strong but noted climbing vacancies raise the questions of oversupply. The multifamily market is “grappling with robust supply” as vacancies have climbed 40 basis points in the past year and are projected to soar by another 110 basis points by 2021, he said.

Completions have outstripped absorption for six straight quarters while absorption slipped to its lowest level in more than five years, Muoio said. “While today’s sub-5 percent vacancy rate is relatively low from a historical perspective, vacancies have climbed to their highest level since 2012 amid this new supply,” he said.

Nationally, multifamily completions should peak this year with more than 300,000 new units hitting the market, outpacing even the highest absorption levels in recent history. As a result, vacancies could exceed 5 percent by the end of the year for the first time since 2011, Muoio said.

“While millennials and other demographic groups continue to forego homeownership in favor of renting in walkable neighborhoods, developers appear to have gotten ahead of themselves in creating rental supply,” Muoio said. “The pipeline can reasonably be described as a flood and though demand for these units is likely to come in the years ahead, we can expect to see some significant digestion issues in the near term.”

Yardi Matrix reported economic conditions remain “favorable” for the multifamily industry, especially in secondary markets that are leading the nation in employment growth. “Domestic migratory patterns are also driving demand in key markets in Florida and the desert southwest,” the report said. “Households received an income boost via the 2017 tax reform package, which has allowed many to afford higher rents. However, economic headwinds are mounting in the form of tariffs and a lower bound to the unemployment rate. We anticipate continued steady growth for the apartment sector, but supply and macroeconomic challenges will likely limit outsize growth.”