Multifamily Outlook
The multifamily sector faces tepid rent growth due to national oversupply and rising operational costs, often outpacing rent growth, though prospects may improve as demand starts to align with supply. Sustained quarters of positive net absorption and a slowdown in new projects could help balance demand and supply quicker, potentially boosting rent growth. Construction starts are predicted to fall by 45% in 2024 due to higher interest rates and costs, potentially leading to undersupply by 2026 as demand catches up. Slight improvements in cap rates suggest some relief, yet overall investment activity remains dampened. The financial appeal of renting tends to increase as home buying becomes less affordable, helping to create a sustained demand for multifamily housing.
According to CoStar, the multifamily sector is experiencing tepid rent growth primarily due to a near-term oversupply.26 As corroborated by Trepp, we notice instances where expenses—such as labor costs, property taxes, and insurance—often rise more rapidly than rent growth.27 Although CoStar’s annual rent growth forecast has slightly improved to 2.5% for H2 2024, following a slow growth of 1.0% in 202326, this modest uptick in annual rent growth is unlikely to instigate a V-shaped recovery in markets burdened by oversupply. Although many CoStar markets have shifted from negative to positive territory from a rent growth standpoint26, with the notable exceptions of markets such as Austin, Tampa, and San Antonio, we still anticipate that overall rent growth for multifamily will remain subdued until supply adequately aligns with demand.
The good news is that demand is already catching up to supply—CBRE data shows multifamily net absorption has remained consistently strong this year due to sustained rental demand.28 According to CBRE’s Q1 2024 Quarterly Figures report, the year 2024 recorded one of the highest first-quarter net absorption totals in the last two decades, with 56 of 69 markets tracked by CBRE recording positive net absorption in the same quarter—an improvement after experiencing negative net annual absorption in 2023.28
Data from CBRE also indicates that the number of projects breaking ground has decreased since the rapid increase in interest rates and due to overall weakening market fundamentals, compounded by higher construction costs.28 Therefore, we expect fewer project deliveries in the near term. Paired with sustained quarters of positive net absorption, this could help stabilize the market from a supply standpoint, potentially transitioning back to a state of undersupply as demand catches up with the limited inventory available.
Affordability challenges29 in the broader housing market may enhance the financial appeal of renting by pricing out many potential home buyers. Housing demand is primarily non-discretionary, a fundamental human requirement; therefore, this can help keep demand fairly stable for the multifamily sector over the long run.
The year-over-year transaction volume for multifamily dropped significantly by 51%, reaching a level not seen since the depths of the pandemic — the decline in multifamily transaction activity was more than the 39% decline observed in the overall CRE transactions tracked by MSCI Real Capital Analytics.30
The significant slowdown in transaction activity is partly attributable to the Federal Reserve's tight lending policies, high interest rates, resulting inflated borrowing costs, rising operating expenses, and tepid rent growth.1,27 Pair that with the fact that according to Green Street, there was significant multifamily value appreciation during 2021-202223, creating discrepancies in the expectations of buyers and sellers. Sellers are generally hesitant to lower prices from their peak acquisition values, and buyers are cautious of overpaying and facing potential negative leverage scenarios.
For the market to rebound, we believe it needs to meet certain conditions: 1) A stabilization or decrease in interest rates, as hinted by 15 of 19 Fed officials post their June 12th meeting31, helping to rejuvenate financing attractiveness and capital market accessibility. 2) Economic stability and a clarified inflation outlook helping restore investor confidence. 3) A resolution in the bid-ask price gap through market corrections is necessary, helping buyers and sellers reach consensus on valuations.
According to the National Apartment Association, cap rates increased to 5.7% nationally in Q1 2024, the highest average rate seen in eight years.32 Thus, prices are beginning to adjust, and the bid-ask spread may be closing.
