With a rebound in absorption and an uptick in vacancy, the multifamily market displayed signs of stabilization in the second quarter, according to new research from CBRE.
In the second quarter, the overall vacancy rate for multifamily increased 10 basis points (bp) from the first quarter to 5%, which is equal to its long-term average. This was less than the 30-bp rise in the first quarter and the 70-bp increase seen in the fourth quarter of 2022, meaning that supply and demand dynamics are stabilizing.
CBRE research shows that the multifamily market saw 70,200 units of positive net absorption in the second quarter, which is the first significant amount of quarterly demand since the first quarter of 2022. On a rolling four-quarter basis, absorption totaled positive 5,700 units, which is a big improvement over the rolling four-quarter total seen in the first quarter—negative 103,500 units.
The second quarter saw 91,400 units of new-construction deliveries, bringing the trailing four-year total to 351,500, which is the highest on record, according to CBRE. However, CBRE says declining construction starts in recent quarters will result in fewer new deliveries in 2024 and beyond.
“Despite a heavy supply pipeline, we are seeing renter demand remain solid as vacancy and rent growth stabilize across most markets,” said Kelli Carhart, executive managing director and leader of CBRE’s Multifamily Capital Markets. “With inflation easing, we anticipate increased investment activity in the second half of 2023, notwithstanding capital markets volatility.”
Year over year, the average monthly net effective rent increased by 2.6% during the second quarter. This is down significantly from the record 15.2% increase in the first quarter of 2022; however, it’s in line with the pre-pandemic five-year average of 2.7%.
Multifamily investment volume totaled $27.5 billion in the second quarter, which is significantly lower than the $95.6 billion from the same period a year ago but slightly higher than the first quarter.
According to CBRE, excluding the second quarter of 2020 at the start of the pandemic, this was the lowest second quarter volume since 2014 and 27% less than the quarter average for 2013 to 2019. However, multifamily retained the largest share of commercial real estate investment volume for the quarter with 35%, up from 30% in the first quarter.
Gateway markets New York; Boston; Washington, D.C.; Chicago; Los Angeles; and San Francisco had a collective $6.7 billion in multifamily investment volume for the second quarter, accounting for 24% of the national total. Dallas-Fort Worth led for investment volume over the past four quarters with $12.1 billion, or 6.6% of the U.S. total.
Other key findings for the second quarter from the latest CBRE research include:
- Most markets tracked, 58 out of 69, recorded positive net absorption, led by Chicago with 4,600 units; Orlando, Florida, with 4,100 units; and Denver with 4,000 units;
- The top five markets for new deliveries over the past four quarters included New York; Washington, D.C.; Dallas; Orlando; and Phoenix–comprising 25% of the national total. New York delivered 27,400 units, or 8%, of the national total;
- Sixty-seven markets had vacancy rates at or above 3%, while 58 markets were above 4%. For the third consecutive quarter, Madison, Wisconsin, was the only market with a vacancy rate at less than 2%. New York was the largest market with the lowest vacancy rate at 3.1%;
- Class A and B vacancy rates were flat at 5.4% and 5%, respectively. The vacancy rates for Class C assets increased 20 bps to 4.8%;
- The Northeast and Midwest saw the highest year-over-year rent growth for the quarter. The Northeast led with 4.4%, down from 5.7% in the first quarter. Newark, New Jersey, led the Northeast’s rent growth at 5.6%, followed by Providence, Rhode Island, at 5.3% and Hartford, Connecticut, at 5.2%. The Midwest experienced 4.3% growth, down from 5.4%; and
- Eight of the 69 markets tracked experienced negative year-over-year rent growth, up from three in the first quarter. Phoenix led the way at -4.1%, followed by Las Vegas at -3.3% and Sacramento, California, at -1.9%.
