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Research from CBRE finds that multifamily fundamentals are starting to stabilize as vacancy rate expansion and negative absorption ease—trends expected to continue through the remainder of the year.

In the first quarter, the overall multifamily vacancy rate increased by 30 basis points (bps) from the fourth quarter to 4.9%. However, this was less than the jumps seen in 2022—a 70-bp increase in the fourth quarter and a 90-bp increase in the second quarter—indicating that supply and demand dynamics are starting to stabilize.

Negative net absorption of 1,900 units in the first quarter also was a quarter-over-quarter improvement, as the fourth quarter saw negative 14,000 units. In addition, CBRE said it expects absorption to turn positive in the second quarter.

“The multifamily sector has been in search of stability after experiencing two significant shifts. First, the Fed began raising interest rates rapidly, and then multifamily fundamentals abruptly changed course as supply growth began to outstrip demand,” said Matt Vance, Americas head of multifamily research for CBRE. “The good news is that the data over the past six months suggests the market is stabilizing. Vacancy is still climbing, but much less quickly as demand regains its footing.”

New construction deliveries came in at 58,600 units for the first quarter, bringing the four-quarter total to 332,000 units. This is slightly lower than the annual total for 2022—343,300 units. According to CBRE, construction timelines remain elevated and should help balance the delivery of the significant pipeline of new multifamily product underway.

The average monthly net effective rent increased 4.5% year over year for the first quarter. While it is down from the record 15.3% annual increase seen in the first quarter of 2022, it is well above the pre-COVID five-year average of 2.7%.

A significant year-over-year decrease was seen in multifamily investment volume in the first quarter. The lowest first quarter volume since 2015, investment volume dropped 63.7% to $24.7 billion. According to CBRE, the rapid rise in interest rates increasing the cost of debt, coupled with less availability of debt, has increased the average multifamily cap rate by more than 1.25 percentage points since the first quarter of 2022. Among commercial real estate, multifamily accounted for the largest share of investment volume, 30%, in the first quarter, down from 44% in 2022’s second quarter.

CBRE shared some additional highlights from the first quarter:

  • The Northeast/Mid-Atlantic and Midwest regions experienced the highest year-over-year rent growth, unseating the Southeast. The Northeast/Mid-Atlantic region led with 5.7% growth, primarily driven by Newark, New Jersey at 7.1%; New York at 6.4%; and Hartford, Connecticut, at 6%. The Midwest came in second with growth of 5.4%, followed by the Southeast, 4.9%; South Central, 4.2%; Pacific, 3.6%; and the Mountain West, 1.4%.
  • Of the 69 markets tracked by CBRE, 35 recorded positive net absorption, led by Orlando, Florida, 3,200 units; Charlotte, North Carolina, 1,300 units; and Nashville, Tennessee, 1,200 units. This up from 25 markets with positive demand in the fourth quarter and 16 markets in the third quarter.
  • Accounting for 26.5% of the national total, the top five markets over the past four quarters for new deliveries were New York; Washington, D.C.; Dallas; Austin, Texas; and Phoenix.
  • Texas markets were among the most active for deliveries over the past four quarters, adding 47,800 units. The Lone Star State markets combined had negative net absorption of 17,900 units during that period.
  • Nearly all of the markets tracked by CBRE, 66 of 69, had vacancy rates at or above 3%, with 57 markets above 4%. For the second consecutive quarter, only Madison, Wisconsin, had a vacancy rate less than 2%. In addition, New York was the largest market with the lowest vacancy rate at 2.9%.