Apartments: Net Absorption Very Low in Q3, New Construction Deliveries Even Lower

Effective Rents up 10.2% Year-over-year

This post includes the Q3 apartment report from Moody’s Analytics Reis and some excerpts from RealPage’s Q3 apartment release. Reis is for large cities only. The softness in net absorption is probably due to the slowdown in household formation, see: The Household Mystery: Part II

Moody’s Analytics Reis Q3 Apartment Report

Moody’s Analytics Reis reported that the apartment vacancy rate was at 4.4% in Q3 2022, down from 4.5% in Q2, and down from a pandemic peak of 5.3% in both Q1 and Q2 2021.

From Moody’s Analytics Senior Economist Lu Chen: A modest slowdown for Apartment

Moody’s Analytics preliminary 3rd quarter data show signs of a modest deceleration in the once rapidly expanding multifamily sector. Net absorption – the change in the number of occupied stock – came in slightly over 21,000 units nationwide. Even after factoring seasonality fluctuations, net absorption is still notably low relative to the 84,040 units for the first half of the year (or average of 42,020 units/quarter).

Amid stubborn supply chain and labor challenges, new construction deliveries fell short with fewer than 12,000 units coming online across the US this quarter. Due to the combination of lukewarm demand and even weaker supply growth, the national vacancy rate still slightly retreated 10 basis points to finish Q3 at a new five-year low of 4.4%. Asking rents increased another 1.6% (1.7% effective) to $1,754 ($1,682 effective), which is $257 more expensive than they were pre-pandemic. While still historically robust, rent growth looked tame compared to the skyrocketing growth established a year ago. The likely culprit: affordability issues are finally squeezing some household budgets. On a year-over-year basis, asking rent growth slid off the peak of 16.9% (17.6% effective) between mid-2021 to mid-2022, and stood at 10.2% (10.6% effective) in this quarter.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999).  Note: Moody’s Analytics is just for large cities.

Moody’s Analytics also reported the effective rents were up 1.7% in Q3 from Q2, and up 10.2% year-over-year (YoY). This is a sharp slowdown from Q2 when rents were up 16.9% YoY.

Last week, I posted a graph of the year-over-year change for various measures of rent. The Zillow measure is up 12.3% YoY in August, down from 13.8% YoY in July. This is down from a peak of 17.2% YoY in February. The ApartmentList measure is up 7.5% YoY as of September, down from 9.8% in August. This is down from the peak of 18.0% YoY last November.

Reis’ survey (dashed red) is quarterly and shows a similar slowdown in effective rents.

Effective rents declined significantly in the early stages of the pandemic, and even with the recent surge in rents, effective rents are up 6.0% annualized since Q1 2020. So, a significant portion of the rent increase over the last year was making up for the previous declines.

Apartment vacancy data courtesy of Moody's Analytics.

RealPage Analytics: U.S. Apartment Demand Plunges in 3rd Quarter

From Jay Parsons at RealPage Analytics: U.S. Apartment Demand Plunges in 3rd Quarter as New Leasing Stalls More than Expected

New renters filled up U.S. apartments at record levels in 2021 and early 2022. But in more recent months, apartment demand has unexpectedly evaporated in much of the country due to what appears to be a freeze in new household formation.

A surprisingly big slowdown in leasing traffic pushed net apartment demand moderately negative in 3rd quarter at -82,095 units – typically a seasonally strong leasing period. It also marked the first time in RealPage’s 30 years of tracking U.S. apartments that demand registered negative during a 3rd quarter period.

Completions and Net Absorption

With the release of the August Housing Starts report, I noted there were the most housing multi-family housing units under construction since 1974, but completions remained low.

Currently there are 890 thousand multi-family units under construction.  This is the highest level since February 1974!

This is that same story for the Reis data for completions and absorptions. For the large cities that Reis tracks, apartment completions were less than 20% of normal, and absorption was about one-third of normal, so there was a mismatch in demand and supply (due to construction delays), and that pushed down the vacancy rate and pushed up rents.

The bottom line is apartment demand was soft in Q3, household formation has slowed sharply, and there are a large number of apartments in the pipeline. We should see completions above net absorption soon, and the completion of all these units under construction should help with rent pressure.