Solid absorption rates, continued strength in the job market and demographics that provide a robust pipeline of renters are all positive indicators for the multifamily sector, according to Kimberly Byrum, managing principal of Zonda Advisory during a recent webinar, “Navigating the Multifamily Market.” While there are some headwinds because of the lack of transactions, tight credit conditions and slow rent growth, the sector is anticipated to weather the storms of a volatile stock market and the slight concern about a potential recession if the Fed doesn’t cut rates as anticipated in September.
Byrum pointed out that macroeconomics is not physics and that all estimates of economic patterns have been skewed by the pandemic, which makes forecasting more complicated. However, the consensus among economists has reached 100% that the Fed will cut the federal funds rate in September, which should have a positive impact on the economy and the multifamily sector.
Another encouraging indicator for the multifamily market comes from the Federal Reserve’s Senior Loan Officers Survey. Since the second quarter of 2023 demand for multifamily loans has been low and credit standards have tightened. However, since the first quarter of 2024, both of those indicators show modest improvement, although credit is still difficult and demand, while rising, is still low, Byrum said.
Transaction volume continues to remain low, which means there’s a lack of price discovery and uncertainty about cap rates. There was an inflection point for cap rates in 2022 and they now hover around 5%.
Jobs, Wages and Consumer Confidence Affect Multifamily Demand
Despite the Fed’s moves to slow the labor market and wage growth to combat inflation, wages remain historically strong. When wages are adjusted for inflation, they have shown low but positive growth – less than 2% - for the past 12 months.
Consumer confidence has been declining in 2024 due to concerns about inflation and job prospects, but when asked about the future, consumer confidence is ticking up slightly, Byrum said.
However, overall job growth expectations are starting to cool off, with a consensus of economic forecasts predicting job growth of 1.1% in 2025 and 2026. The “stairstep down” of growth over the next few years can be used for modeling for future development, Byrum said.
Supply Metrics, Rent Growth and Renewals
A wave of new apartment supply has kept rent growth muted in most locations. However, while 55% of markets report year-over-year negative rent growth, when reviewing the data on a year-to-date basis, Byrum found that 90% reported positive asking rent change.
Bryum anticipates a second wave of supply to arrive in about 10 months, in the second quarter of 2025. Deliveries are anticipated to begin to decline after that into 2027. Byrum expects asking rents to decline in 2025 and then improve in 2026.
Despite the new supply, absorption rates have remained healthy. The majority of deliveries have been absorbed in every market, and in some markets even previously vacant units have been absorbed. Markets with the highest absorption levels year-to-date are Dallas, Austin, Atlanta, Phoenix, Houston and Washington, D.C.
Occupancy rates are expected to stabilize at 93% over the next three years in anticipation of an economic slowdown and the pipeline of new supply.
High interest rates and supply side issues continue to slow multifamily starts, which have decreased by 43% since June 2023. However, Byrum said that some of the current additional supply is due to delayed deliveries slowed by Covid construction issues.
Homeownership rates continue to decline due to the high cost of buying, particularly with the monthly cost of owning estimated to be 60% more than renting in many markets. Currently multifamily owners report that move-outs due to homeownership are low and renewal rates are stable at about 55%. Not only is the cost of homeownership prohibitive, but uncertainty about job stability dampens renter enthusiasm for moving, Byrum said.
Millions of Renters in Every Generation
Byrum predicts a runway of at least 15 years of renters from the Gen Z and younger millennial generations who are not ready to become homeowners. She recommends looking for opportunities to meet the needs of Gen Z renters who are new to the multifamily market. Millennials are 29% of the working population and 50% of them rent.
In addition, there are more than three million people in the older Gen X and baby boomer generations who are likely to downsize and move into apartments or build-to-rent communities to take advantage of the renter lifestyle, Byrum said.
Market Metrics: Job Growth Drives Multifamily Growth
Job growth is the most immediate metric of overall growth in a metro area, Byrum said. The metro areas with the strongest job growth year-over-year so far in 2024 include Miami, Fort Lauderdale and Raleigh, all of which saw job growth between 2.4% and 3.2% and have low unemployment rates. Sacramento and Houston also have strong growth, but with higher unemployment rates of 4.7% and 4.8%, respectively. Other markets with strong job growth so far in 2024 include San Antonio, Indianapolis and Austin.
Tech markets such as Seattle, San Francisco, San Jose, San Diego, Denver and Nashville are seeing slower job growth of under 1% and slower multifamily activity, Bryum said.
Markets with job growth in the 1% to 2% range but with room for continued growth include many in Texas, the South and Southeast, such as Fort Worth, Dallas, Charlotte, Atlanta, Jacksonville, Tampa, Orlando, along with Anaheim, Los Angeles and Washington, D.C.