Multifamily
CUSHMAN & WAKEFIELD RESEARCH
Despite an unprecedented supply wave, the multifamily market is enjoying a solid year characterized by healthy rental demand and positive rent growth. Looking at vacancy rates alone, which steadily increased from an all-time low of 5.0% in 2021 to 7.8% as of Q3 2023,6 would be suggestive of deteriorating market conditions, but it also masks favorable demand-side trends that have reemerged this year. It’s worth remembering that the multifamily sector was posting record demand when first coming out of the pandemic, so it was destined to cool. In 2021, the U.S. economy absorbed 539,000 apartment units, more than double any year on record. The reversal came in 2022 as absorption registered just 114,000 units in the weakest year since 2011. The question became: would this foreshadow more payback in 2023 or would demand normalize after a mini boom-bust cycle? So far in 2023, the latter narrative has won out.
📣 Sam Tenenbaum, Head of Multifamily Insights
Absorption has already doubled the annual total from 2022, solidifying our outlook for a secularly strong multifamily market over the long term.
Macroeconomic and demographic factors have contributed to resurgent demand this year. Amid sharply higher mortgage rates and buoyant single-family home prices, the economics of renting versus owning have never been more favorable. The average monthly cost of a home mortgage is now $400 more expensive per month than the average rent. This figure does not include the additional costs associated with owning a home (i.e., taxes, insurance and upkeep). If all costs of homeownership were included, the monthly cost savings of renting vs. owning would be closer to $1,000 on average. The homeownership rate had been rising consistently from 2016-2022 but has since stalled out at 66% over the last year as more potential buyers are squeezed out of the market. Meanwhile, the resilient labor market combined with easing rates of inflation have allowed real disposable personal income to grow on a year-over-year (YOY) basis in 2023, limiting the need for doubling up among roommates and family members.
While demand drivers remain strong, it’s been no match for new supply. The 350,000 units delivered last year was the highest annual total on record, and 837,000 units currently under construction7 are expected to be completed over the next several years. Even if demand were to accelerate substantially, as outlined in our upside scenario, the vacancy rate would still likely move higher by about 50 basis points (bps) as new projects lease up.
Under the more modest economic assumptions in our baseline forecast, the national vacancy rate increases from its current level of 7.8% to reach 9.0% at the end of 2024 as leasing momentum slows, before retreating to historical norms.
The supply wave is a near-term phenomenon, and we are currently at or very near the peak. New supply is expected to crest in early 2024 and we are forecasting 400,000 new units to come online next year in total. But after that, supply is set to slow abruptly, settling into an average of 183,000 units delivered per year from 2025-2027, nearly 25% below the 2015-2019 average. Multifamily construction starts are already down 60% from 2022, and some portion of projects that have been permitted but not yet broken ground will be abandoned due to lack of financing and other challenges. Moreover, developers are likely to be cautious about planning new developments in an environment where elevated interest rates, rising vacancy, and broader economic uncertainty remain central themes for the next several quarters. This is especially true given the geographic concentration of recently constructed buildings. Since 2020, five markets have accounted for 25% of the total multifamily units delivered across the U.S., so builders are likely to pull back in some of these “hotter” markets and submarkets naturally, notwithstanding the aforementioned economic and financial headwinds. Rising vacancy rates are a given in 2024, but there is greater uncertainty around the outlook for rental growth. If 2023 is any indication, landlords should continue to mark down asking rents and offer more concessions in efforts to preserve occupancy and incomes. National rent growth, while still increasing on a YOY basis, has decelerated markedly from 13.4% in 2021 to 4.7% in 2022 and now 1.3% in the third quarter this year. In our base case, we expect the softness to continue with multifamily rents declining by 2.3% in 2024. This would be the first year that rents declined since 2009 when they fell 3.4%. But as new construction deliveries bottom out and economic growth accelerates in 2025, rent growth will resume, climbing by 1.9% before popping another 5.1% in 2026.
This trajectory follows the narrative of a modest recessionary scenario in 2024, but deviations from that baseline could swing rents in either direction.
Additionally, performance at the local market and asset level could vary widely from these national averages given the disparity in market activity over the past several years. For example, in the third quarter, more than one-third of markets tracked by Cushman & Wakefield saw rent growth accelerate relative to the previous quarter, many of which are Midwest and Northeast markets that did not experience the supply boom that occurred elsewhere.
Longer term, the multifamily market is poised for balanced growth in demand and supply. Despite the current pipeline, housing is likely to remain undersupplied for years and investor interest indicates a clear proclivity for multifamily development. On the tenant side, mortgage rates are not likely going back to 4% anytime soon, and with 80% of homeowners locked into these lower rates, the single-family market could remain relatively more expensive than renting for an extended period. This will be impactful on the prime rental cohort (ages 20-34), which is projected to increase from 68 million in 2023 to 70 million by 2033, with 45% of Gen Z just entering their prime rental years (~33 million).
