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As the apartment industry heads into its prime leasing season, Kimberly Byrum, managing principal of multifamily at Zonda, says some normalcy seems to be returning to the sector.

On the Zonda Multifamily Market Update webinar in early May, Byrum broke down key industry talking points and provided insight into potential opportunities.

Kimberly Byrum, Zonda
Kimberly Byrum, Zonda

“2022 was a banner year overall for the industry and certainly from an operations standpoint,” she says. “We have ticked a little shy of 95% for occupancy, which was expected. We’re operating more in that long-term historical perspective.”

However, while occupancy has dropped back, rents have not adjusted downward. While the surge that began in 2021 peaked in the third quarter of 2022, rents have stabilized and come down very little.

“We are definitely in a holding pattern,” she says. “A lot of what I’m hearing from people is that deals just don’t pencil. Cap rates are up, but it’s hard to predict where they are right now due to the lack of transactions. Yield expectations are up, and underwriting rent growth is down from where we have been—we are estimating between 2% to 3%.”

Byrum adds that construction costs are flat with no signs yet that they will be decreasing, saying much of the costs are driven by labor.

“We’re hoping there will be some relief there as the pipeline begins to clear out,” she notes.

Here are five additional takeaways from Byrum’s presentation.

1. Stabilized Concessions Remain Low

Stabilized concessions have ticked up slightly, but they are still hovering around the bottom.

“I always say stabilized concessions are a good indicator of where the market is,” she says.

Byrum says in places where new lease-ups are offering a month free, she has seen one or two stabilized competitors jump on the concession bandwagon. However, nothing wholesale is being seen at this point, and it’s not impacting the numbers.

2. Pipeline Projections

In the top 25 markets where Zonda operates, Byrum says, “as we are operating right now, we are about 4.6% up from what was delivered last year, which is about normal.”

“One of the biggest bright spots is if you’re opening a project today, you are probably 10% higher than your original pro forma,” she says. “We really haven’t seen those rents come down yet, so you are really sitting in a great spot as you begin pre-leasing this year.”

2024 will be a peak pipeline year in many markets, but then Byrum says it falls off completely. The number of units under construction is expected to decline by 6% in 2025 and 12% in 2026, with those years being referred to as a “future tailwind.”

What markets are slowing down the most for the future? She says to watch Los Angeles and Sacramento, California; Fort Worth, Texas; Denver; Orlando, Florida; and Raleigh, North Carolina.

3. Back to the Basics

When operating in a high pipeline competitive market, Byrum advises actionable items concerning traffic and the product before adjusting the rent pricing.

“Pricing is the last place to go, but always the first solution in everyone’s mind,” she says.

If traffic is down, it’s important to analyze office hours at comparable properties, ensure the leasing staff is appropriate for peak days, and maximize AI to answer prospective renters’ questions.

In addition, she says a commoditized market requires a high level of amenities, and it’s important those amenity spaces are in working order and are being effectively marketed. Other suggestions in terms of product are having units available to view, making sure floor plans show room dimensions, and moving the model to the hard-to-lease units.

4. Office Conversion Considerations

Byrum says she gains a lot of insight into office conversions from reading reviews of residents living in these buildings.

Many complaints have to do with the natural conflict between people who live in a building and those doing business a building.

“Come up with solutions as you are designing these buildings to address some easy but important issues for residents,” she says.

Some other issues to consider:

  • The higher the floor that the residential starts on can be more beneficial for unobstructed views in urban areas;
  • Ceiling heights could be a detriment if too short; Balconies are a bonus if you can retrofit;
  • The size and number of windows as well as if they are operable are critical;
  • The number of elevators are a boost for residents;
  • The charm of historical buildings is another plus; and
  • Understanding the mix of uses is key in ensuring renters’ needs are met.

5. Townhome Trends

“Townhomes are starting to emerge again as a percentage of the pipeline,” Byrum says.

Places like Las Vegas and Phoenix, where build-to-rent (BTR) is more popular, have a higher percentage of two-story units coming to market.

The space and design are two important factors for townhome renters. A lot of the benefits are in the layout, with larger kitchens, spacious interiors, storage, attached garages, and porches and yards, which also are part of BTR lifestyle that some renters are seeking.

“There’s a pride in townhome living,” she says, adding that the word “townhome” resonates with renters and should be in a community’s name and in the marketing materials.

One negative, she says, is three-story townhomes may not be as popular as two-story townhomes, noting that she has seen negative rent adjustment for the three-story units.