As we entered 2023, most predictions called for challenging overall economic conditions. Looking back objectively, the broader economy outperformed those expectations, with inflation well under control and job growth continuing at a healthy clip.
Multifamily, however, experienced its first decline in three years.
We knew the performance was going to be softer than 2021 and 2022, but we also had reason for optimism when occupancy remained stable for the first half of the year. The industry’s high point of 2023 came in the spring with a return to seasonality after the unsustainable rent growth of the previous two years. While we didn’t hit typical traffic numbers nationally, rents did pick up early in the year after a relatively weak winter season. The normal shape of seasonal trends was there across nearly all metrics, with one notable exception.
Supply Surge Leads to Dip in Occupancy
The biggest surprise of the year was the dip in occupancy, beginning in late June when the industry traditionally sees a seasonal occupancy swell. After holding strong at 94.3% for the first six months of 2023, occupancy fell off by 50 to 60 basis points over a period of three months.
The primary culprit was an increase in supply, which outpaced demand. At one point in 2023, the industry had more than a million units under construction nationwide. Unfortunately, the demand for multifamily moves much slower.
Markets with long-term trends of demand, migration, and population growth—the Southeast and Southwest, specifically Atlanta; Austin and Dallas, Texas; Charlotte and Raleigh, North Carolina; Nashville, Tennessee; and Phoenix—have been hit particularly hard. With so much supply coming into these markets, performance has been overwhelmed and rents have fallen meaningfully. In Austin, where supply efforts have been heavily concentrated, rents are down roughly 8% year over year. In downtown Austin, rents are down more than 10%. Those supply boom epicenters are struggling.
Market Exceptions
Conversely, markets that have already moved past their major supply booms, and markets that did not see major supply pipeline growth—like Baltimore, Boston, Chicago, Denver, and Washington, D.C.—as well as smaller Southwest markets like Albuquerque, New Mexico, and Tucson, Arizona, are performing better. Rent growth is around 2% to 3%, which is significant given that national rents are down 1.5%. Their urban cores are faring better, too.
In major West Coast markets like Los Angeles and San Francisco, occupancy is holding steady, but traffic and leasing numbers are well behind national averages. The regulatory challenges, outward migration, and overall demand in those markets have hampered performance and created unique circumstances to work through.
What to Expect in 2024
We have yet to see a bottom for occupancy at this point, due to the supply in the pipeline yet to be delivered. Occupancy rates will likely continue falling through the winter. The spring leasing season may provide a bit of a respite, but ultimately the reprieve will come once we absorb the delivered units and push past the current supply wave. The supply surge will last throughout 2024 and at least midway through 2025, at which point the affected markets will bounce back quickly if demand remains elevated.
The good news is the industry has already recognized its supply surplus. Recent data shows approximately 1,200 units of new supply being canceled per week over the past six months. The cancellations are taking place in the planning phases, meaning projects that might have broken ground this year or next are being rescinded or postponed. A rate of 1,200 cancellations per week translates to almost 70,000 units over the course of a year. However, with more than 800,000 units currently under construction nationwide, the math is still sobering.
While these cancellations won’t move the needle tremendously, interest rates and construction costs contribute to an environment that isn’t conducive to building. The industry could see a sharp pause in development by mid-2025, and a dramatic drop-off in delivered units should lead to a rapid rebound in rent, occupancy, and property performance.
The Return of Transactions
Multifamily was recently given reason for optimism based on Fed indications for future policy that could lead to more transaction activity. Transactions had ground nearly to a halt in late 2022 and throughout 2023. The data suggested we were at less than 40% of normal transaction volume in 2022. While interest rates won’t fall tremendously, and we won’t go back to pre-COVID levels for some time, the reemergence of transactions could certainly be a trend in 2024.
Moving Forward
Multifamily is still well positioned for the long term. A study released by the National Multifamily Housing Council said the industry needs 4 million homes by 2035. If the industry delivers a million units in 2023-2025, we’re already a quarter of the way there. Even though it feels like the sky is falling from a supply perspective, we still need to build more in the long term. It will require patience and perseverance to get out of this current rut, but the industry has been through this before and will emerge strong when the supply wave passes.
