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The good news for the first quarter is that job growth far exceeded economist expectations thus far, with more than 825,000 jobs created in the first three months of the year. More jobs mean more qualified renters, which is crucial to the absorption of the surplus of multifamily homes online and on the way.

However, the supply surplus continues to hamper rent growth. The first quarter saw more than 124,000 new apartment homes delivered, with another 117,000 projected for the second quarter. The challenge is leasing up the vacancies and restoring normal occupancy rates so rent growth can stabilize. The 4.1% annual wage growth posted in February, along with a 3.8% national unemployment rate, are certainly trending in the right direction.

The question becomes whether job growth and other economic indicators will keep pace as the year progresses and whether the hardest-hit housing sectors will feel any respite.

Employment Metrics Cautiously Encouraging

With record levels of supply coming online, the industry could not have asked for better economic conditions. Job creation translates directly to household creation, meaning more prospective renters seeking apartments and filling vacant units. High interest rates continue to make home buying prohibitive as well, pushing more people to the rental market.

While overall job growth figures are promising, some markets have already revised initial job reports for the quarter. For example, last September Los Angeles initially reported year-over-year job gains of 123,000 but recently revised it to a loss of 19,000 jobs. Also, job reporting may be somewhat misleading in some markets. Depending on the region, many new jobs created may be at mid- or low-tier wage levels, and consequently housing demand will be created but not necessarily deliver qualified applicants for the brand-new supply being introduced to the market.

The industry needs the job market to remain strong throughout the year to bolster traffic and lease conversion. Until multifamily hits its peak for deliveries and the rate of new leases finally catches up to the availability, the market can’t begin to normalize.

Signs of Life

The supply hangover will linger throughout the year in most markets and metros with severe supply overcorrections likely not stabilizing until 2025 or even 2026. However, some markets have already begun to emerge from the supply cycle and experience modest rent growth.

Larger markets like Washington, D.C.; Boston; and Chicago are seeing between 2% and 3% rent growth year over year, which is approaching long-term averages. Other metros like Las Vegas are on the upswing, as well. At mid-summer of last year, Las Vegas rents were down 8%, but by the end of the first quarter they were at negative 1.9% and nearing stabilization. Several slower growth markets in the Midwest have also demonstrated a rapid return to near-normal rent growth, in contrast to the more volatile markets of the Southeast or Mountain West.

Supply Surplus Straining Certain Markets

In regions where supply delivery overcorrected post-pandemic, supply saturation remains at unprecedented levels. Markets like Atlanta; Austin, Texas; Dallas; Nashville, Tennessee; Orlando, Florida; Phoenix; and Raleigh, North Carolina, where delivery is already high and is still climbing, will be closely watched throughout the year to see when rent growth hits the bottom of its descent and finally flattens out.

The gap in terms of top performers from a market perspective—in terms of rents and occupancy—has never been greater in recent memory, outside of the COVID years. Typically, such disparity is a significant indicator of economic instability and points to a pending recession. But this performance gap was created primarily by markets that overheated and are now coming down from their demand peaks.

The gaps exist even within neighboring submarkets, based on price point and neighborhood. In Atlanta, where rents are down by an average of 5%, there are parts of the market where rents are trailing last year by as much as 10% and other submarkets where rent growth is essentially flat.

Operators Focusing on Renewals

The end of the first quarter typically marks the start of peak leasing season. The bulk of lease expirations take place in the second and third quarters, which traditionally increase the number of units available as renters give notice. This year, however, the number of available units isn’t increasing at a normal pace, despite steady increases in leasing traffic.

What this indicates is that more people are renewing their leases, likely as the result of very conservative, if any, rent increases from operators. Due to the difficulty in signing new leases, operators are focused on retaining their current residents and protecting their occupancy rates. Therefore occupancy rates held relatively steady at 93.8% in the first quarter—nearly a full percentage point behind recent years—though new lease signings are tempered.

Moving Forward

The outlook for the second quarter and the rest of the year really depends on whether the economy and job growth can maintain their current pace. If the economy keeps producing jobs at a steady clip, units will steadily fill, the supply/demand balance will return, and the market will right itself. In some markets, the process will take longer than others, but some markets have already emerged on the other side of the supply surplus and proven that the wait is worth it.