Moody's: National Multifamily Supply and Demand at Lowest Levels since 2009

Apartment Vacancy Rate Unchanged in Q4

The big story here is that demand for apartments fell off a cliff in Q4 2022, but that new supply was also very low, even though there are a large number of apartments currently under construction.

First, from Moody’s Analytics Senior Economist Lu Chen and economist Xiaodi Li: Apartment struck a balance, Office demand plummeted, and Retail remains flat

National multifamily supply and demand both cooled to their lowest levels since 2009. Net absorption and new construction leveled off at just around 10,000 units in Q4, keeping the national multifamily vacancy flat at 4.4%. … Total construction delivery and net absorption only reached 100,470 units and 135,472 units for the year respectively, the weakest record over the past decade. 

Expectedly, rent growth cooled after the ‘hot’ summer season and asking/effective rent growth slid off the peak of 2.8%/3.0% in Q2 to 2.0%/2.0% in Q4. Effective rent climbed above $1,700/unit for the first time, $294 higher than pre-pandemic (or 20.6%). Unexpectedly, the stable rent growth for both new and existing leases was still the second highest Q4 growth rate since 2000 and only second to the record growth last winter. … As affordability concerns pressured rent growth, annual asking/effective rent growth plummeted from 16.9%/17.6% in Q2 to close Q4 in single-digit range, at 9.4%/9.6% respectively.

Moody’s Analytics (Reis) reported that the apartment vacancy rate was at 4.4% in Q4 2022, unchanged from 4.4% in Q3, 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 were up 2.0% in Q4 compared to Q3, and up 9.6% year-over-year. Effective rents declined significantly in the early stages of the pandemic, and rents are up 6.5% annualized over the last 3 years.

US Metros

From Moody’s Analytics:

Multifamily vacancies rose in nearly half (35 of 79) of primary metropolitan areas, which was 20 more than last quarter. Chattanooga (+0.7%), Greensboro/Winston-Salem (+0.7%), and Greenville (+0.7%) topped the list due to weak demand. Specifically, Chattanooga had negative net absorption for the year, while all three metros recorded more move-outs than move-ins in the fourth quarter. 

More than 500 units were delivered in Houston (1,165), Northern New Jersey (995), Phoenix (971), New York (885), Boston (542), and Austin (542). Among these six metros, demand persevered in New York, Boston, and Austin and vacancy trended down in these three markets as a result. On the other hand, over-supply forced an uptick in vacancies across Houston, Northern New Jersey, and Phoenix

Multifamily effective rents fell in 15% (12 of 79) of all markets, 40% of which were ”pandemic darling” markets with the fastest rent growth during the COVID pandemic. Baltimore (-3.4%), Memphis (-3.3%), San Bernardino/Riverside (-2.0%), Atlanta (-1.7%), Palm Beach (-1.6%), and Ventura County (-1.1%) all recorded more than 100 bps decline in effective rent. Monthly data shows a decline in market rent across over 20 markets although the quarter-over-quarter data still recorded positive growth. We expect quarterly rent decline in some of those markets early in 2023.

We are starting to see rents decline in some areas as more supply comes on the market. This should increase in 2023.

Completions and Net Absorption

With the release of the November Housing Starts report, I noted there were the most housing multi-family housing units under construction since 1973.

Currently there are 932 thousand multi-family units under construction.  This is the highest level since December 1973!

This is that same story for the Moody’s Analytics data for completions and absorptions. For the large cities that Moody’s Analytics tracks, apartment completions were only about 30% of normal over the last 2 quarters, and absorption was also only about 30% of normal (absorption was 15% of normal in Q4!), so even though demand fell off a cliff, builders are still struggling to complete apartment units (due to construction delays), and that kept the vacancy rate unchanged.

The completion of all these units under construction should help with rent pressure and we will see more areas with declining rents in 2023.

Apartment vacancy data courtesy of Moody's Analytics.

I’ll have much more on rents soon.