Bumpy economic news, which is likely to continue throughout 2024, includes both positive and negative messages for the multifamily sector, according to Kimberly Byrum, managing principal of Zonda, a housing market research and advisory company, in a recent industry update.
The housing shortage and affordability issues for buyers continue to positively impact rental property demand, Byrum says. In addition, consumer uncertainty about future income opportunities may support renewal rates.
While absorption rates vary by market, generally Byrum anticipates a gap in the pipeline of deliveries during the fourth quarter of 2026, about 32 months from now. She suggests that multifamily investors can begin predevelopment now to potentially deliver new buildings during that pipeline gap.
One big wave of multifamily deliveries just came through during the first quarter of 2024, with a second wave anticipated in the second quarter of 2025. Byrum anticipates asking rates to decline and concessions to be up in 2025 and 2026 in some markets, particularly if job growth maintains a slower pace.
Economic Outlook and Impact on Multifamily Sector
Many economists have raised their outlook for the U.S. economy in recent months and corporate leaders have stopped talking about a potential recession. The U.S. is currently in its second longest stretch without a change in the Federal Funds rate. Byrum anticipates rates to drop by 25 basis points in September, with a second rate drop in November.
The 10-year Treasury is near a two-decade high, which is taking commercial real estate on a rollercoaster ride, Byrum says. Multifamily transactions are currently down 72% from the peak level of transactions in 2021.
Job growth, which Byrum says is one of the most significant indicators for the multifamily sector, is anticipated to be 1.4% annually for 2024, followed by a slowdown to 0.8% in 2025 and 0.4% in 2026. Those job growth rates are consistent with historically stable economic periods and could benefit renewal rates, she says.
“Consumers are less comfortable about their job situations and are less likely to quit,” Byrum says. “We’re already seeing people stay longer in their rental homes and that’s likely to continue.”
Housing Shortage and Construction Pipeline
Zonda estimates that the U.S. is short by about 1.8 million units, while the National Low Income Housing Coalition estimates that the U.S. is short 7.3 million affordable rental units. The National Multifamily Housing Council’s base case estimate is that the U.S. needs to build 310,000 units annually through 2035 for a balanced market.
Overlooked states that lack housing production and are seeing strong rent growth include Pennsylvania, Ohio, Michigan, Minnesota, Wisconsin, North Carolina, Oregon and Utah, according to Up for Growth.
The construction pipeline recently dropped to approximately 950,000 units under construction. Prior to the pandemic, approximately 48% of units under construction were delivered each year, but during the pandemic this declined to 33% annually.
“Multifamily deliveries will peak in the second quarter of 2025,” Byrum estimates. “The best time to deliver multifamily units will be in the fourth quarter of 2026 since our estimate now is that there will be less than 300,00 units delivered then on an annualized basis.”
Occupancy rates are likely to drop 120 basis points from 2024 to 92.7% in 2025, Byrum estimates, but they will still be above occupancy rates during the great financial crisis. She expects occupancy rates to bump up in 2026.
Rent growth is likely to be slightly positive to flat in 2024, but estimates may change based on job growth and vary by market.
Asking rents were up 2.9% in the Midwest in the first quarter of 2024 compared to the first quarter of 2023, and up 2.7% in the Northeast. However, pipeline issues caused asking rents to dip 0.8% in the South and 0.2% in the West.
Renewal rates are above average now at 54%, compared to 55% during Covid, 52% during stable economic periods and 47% during the great financial crisis. Zonda calculated blended rent growth based on renewals and lease trade outs and found that markets with the highest percentage of renewals saw the highest rent growth.
“Renewals will be extremely important for operators over the next two years, so operators should keep their percentage of renewals as high as possible,” Byrum says.
Markets to Watch
Zonda researchers studied multifamily permitting in various markets and found multiple places that are underbuilt by 3% or more, including Charlotte, Sacramento, San Diego, Dallas-Fort Worth, Miami-Fort Lauderdale, Fort Myers, Indianapolis, Tampa, San Jose, Atlanta, San Francisco, Riverside and Las Vegas.
Multifamily markets that are underbuilt by 1% to 3% include Portland (Oregon), Los Angeles, Jacksonville, Columbus, Orlando, Phoenix, Seattle and Boston.
Multifamily markets that are balanced between estimated demand and permits include Denver, Oklahoma City, Richmond, Salt Lake City, Nashville and San Antonio.
The top markets where absorption rates in the first quarter of 2024 were twice the absorption rates during the first quarter of 2023 include Dallas, Phoenix, Austin, Atlanta, Houston, Charlotte, Orlando, Seattle, Las Vegas, Denver, Raleigh, Nashville, Tampa, Washington, D.C. and Miami.
Back to the future multifamily gap: based on Zonda’s research, markets where multifamily developers should go ahead and initiate predevelopment activity for deliveries in the fourth quarter of 2026 include San Jose, Oklahoma City, Seattle, Portland (Oregon), San Francisco, Los Angeles, Washington, D.C., Denver, San Diego and San Antonio.
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