Multifamily
U.S. MACRO OUTLOOK UPDATE
Steady job growth, strong immigration and healthy household formation are underpinning strong demand for apartment units thus far in 2024.
The 30-yr fixed rate mortgage has been hovering in the 6.5% to 7% range for most of 2024, up from the 3% to 4% range prior to the Fed's rate hikes. This increase, along with rising single-family home prices, is making home buying unaffordable for many, boosting demand for multifamily housing. The 30-yr fixed rate mortgage is expected to remain above 6% through the end of 2025.
Healthy household formation is expected over the next two years, averaging over one million new households annually. This, coupled with a lack of affordable single-family housing, should sustain apartment demand in the forecast horizon.
The multifamily vacancy rate has risen from a low of 5.1% in mid-2021 to its current rate of 8.7% as of Q1 2024. Our baseline forecast calls for vacancy to peak at the end of this year at 8.9%, before adjusting lower to 8.3% in 2025 and 7.3% in 2026.
The pipeline is thinning out due to market conditions and challenging financing conditions. Multifamily permits as of the first quarter 2024 are down 38% from their peak, which will help vacancy tighten on the other side of the supply wave. Forecasted deliveries total 400,000 this year, but that total will be roughly halved in 2025.
While it will take several quarters for these new units to be leased, demand is clearly on a solid trajectory as evidenced by the first quarter, where the 85,900 units absorbed was the strongest in two-and-a-half years and the second highest first quarter total on record. Demand is expected to average 292,000 units per year in 2024-2025, slightly stronger than the 2017-2019 average.
Property owners have been generally prioritizing occupancy over rental increases, leading to decelerating rent growth over the last year. National rent growth is expected to bottom at 1.2% in 2024, before reaccelerating to 2.7% next year and 5.1% in 2026.
