Moody's: Multifamily Demand "Softened notably over the past few quarters"

Apartment Vacancy Rate Increased in Q1

The big story here is that demand for apartments has softened recently, rents are falling in some areas, and there are a large number of apartments currently under construction that are expected to be delivered this year.

From Moody’s Analytics Senior Economist Lu Chen and economist Nick Luettke: Apartment temporarily oversupplied, Office approaching peak of vacancy, and Retail remained flat

The tide has been gradually shifting for the multifamily sector. “Pandemic fever” once fueled by discounted rental price and migration has gradually subdued as rent burden grew while economic growth and household formation slowed. Multifamily demand has softened notably over the past few quarters with net absorption even teasing slightly below zero in the first quarter of 2023. But because net move-outs based on preliminary trend were so small, we would not be surprised if the sign flips when more construction data gets verified and backfilled in the next few weeks. Overall, we remain cautiously optimistic for multifamily demand, given a few inter-playing factors including the cooling of the single-family housing market, resilient labor market, and positive household real income growth. While leasing was weak, construction activities were at a record high. Projects started in 2021 and early 2022, when rent growth has high and the cost of borrowing low, are expected to complete this year and next. First quarter delivery, however, was sluggish as elevated borrowing costs and a slight uptick of supply chain stress delayed construction timelines. Vacancy ticked up 13 basis-point (bps) to end Q1 at 4.71%. This was the biggest jump over the past two years, which pushed the current vacancy over the pre-pandemic level of 4.68%.

Compared to year end 2022, rent declines became more widespread in the first quarter, with 60 primary metros recording negative market rent growth ranging from -0.1% to -6.4%. At the national level, asking/effective rent declined by 1%/0.9% respectively, which not only helped level off renters’ rent burden, but also will work its way through taming shelter inflation in the headline CPI. On a year-over-year basis, both asking and effective rent growth slowed from over 17% in Q2 2022 to just around 6% in this quarter.

emphasis added

Moody’s Analytics (Reis) reported that the apartment vacancy rate was at 4.7% in Q1 2023, up from 4.6% in Q4 2022, and down from a pandemic peak of 5.4% in both Q1 and Q2 2021.

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.

Reis also reported the effective rents declined 0.9% in Q1 compared to Q4, and up 6.0% year-over-year. Effective rents declined significantly in the early stages of the pandemic, and rents are up 6.0% annualized over the last 3 years.

US Metros

From Moody’s Analytics:

Multifamily vacancies rose in nearly half (37 of 79) of primary metropolitan areas, up slightly from 35 the previous quarter. Fort Worth (+90 bps), Nashville (+90 bps), and Tucson (+0.8 bps) topped the list due to weak demand. All three metros also saw asking and effective rents decline by more than a percentage point in Q1. 

More than 1,000 multifamily units were delivered in Austin (1,512), Phoenix (1418), Nashville (1,275), Tampa-St. Petersburg (1,100), and Atlanta (1,017). Only one metro delivered over 1,000 units in Q4 comparatively. Among these five metros, the increased supply contributed to less than 100 bps uptick in vacancies.

Multifamily effective rents fell in 76% (60 of 79) of all markets. Fairfield County (-6.4%), Louisville (-3.6%), Greensboro/Winston-Salem (-3.3%), Syracuse (-2.8%), and Raleigh-Durham (-2.8%) were the markets observing the largest decline. Among those metros, 30 metros declined by at least 100 bps with 14 of them declining by over 200 bps.

We are seeing rents decline in some areas as more supply comes on the market. This should increase throughout 2023.

Apartment vacancy data courtesy of Moody's Analytics.