Zonda managing principal Kimberly Byrum says 2022 is shaping up to be “a very strong year for multifamily” based on current trends, noting that renewal activity in the second quarter will be a strong indicator of where the multifamily market is headed and of market stability.
While market volatility and inflation are concerns affecting renters’ decisions, Byrum says rising interest rates are working in the favor of the multifamily market as it impacts decisions on renting versus buying. During Zonda’s most recent Multifamily Market Update webinar, Byrum outlined an example in Dallas, suggesting that increases in interest rates have made buying much more expensive relative to renting, factoring in rising wages and inflation. In Dallas, recent rate increases have resulted in a 38% increase in monthly mortgage payments for homeowners. Conversely, the average renter in Dallas with a 5.5% salary increase would be able to sustain the average rent increase while still having additional monthly take-home pay to account for rising costs for food and gas.
“These mortgage rates are really impacting renters,” Byrum says. “The cost of homeownership is really going to make a difference in the rental market.”
Byrum says the multifamily space is at an all-time high occupancy rate of 97.6% heading into the second and third quarter leasing season, exceeding the 95% mark from prior to the pandemic. After renewal rates bottomed at 51.6% in the fourth quarter of 2020, rates have been increasing steadily over 2021. After a minor decline in renewals during the fourth quarter of 2021 due to rent surges, the renewal rate reached an all-time high level of 58.3% during the first quarter of 2022.
“We are at an all-time low of vacant units available because we’ve gobbled up vacant units as well as new construction,” Byrum says. “We have a limited pipeline that we’re looking at for this year, and we have very high renewal rates.”
Byrum says a majority of markets experienced a “surge” of more than 10% in asking rent between July 2021 and April 2022, with markets such as Anaheim, California, and Orlando and Tampa, Florida, experiencing growth greater than 12% for Class A rentals during the nine-month period. According to Byrum, Anaheim’s Class A outperformed its Class B in terms of rent growth for the nine-month period by the widest margin, while Class B rentals in Nashville, Tennessee, and Seattle outperformed Class A in terms of rent growth over the same nine-month period by the widest margin.
For supply and demand conditions, after reaching more than 666,000 units absorbed year over year during the fourth quarter of 2021, Byrum forecasts demand will decline through 2024.
“As the Fed continues to slow the economy down with rate increases, we are anticipating demand to decrease while supply continues to ramp up,” Byrum says. “But that is needed, because the occupancy rate sits at 97%. We do need building to occur so we can bring that [occupancy rate] down to a more sustainable number and moderate some of these rent surges that are occurring.”
Byrum says by the end of the building period in 2024, the market may be down in the 94% occupancy range, with more stable demand and supply numbers around 300,000 units absorbed and built on an annual year-over-year basis.
Assuming demand normalizes from pandemic levels, Byrum says Dallas; Houston; Las Vegas; Riverside, California; and San Antonio are likely to have undersupplied pipelines through 2023. Markets such as Anaheim; Austin, Texas; Charlotte, North Carolina; Los Angeles; Nashville; Orlando; Phoenix; and Seattle are projected to have pipelines that are in balance, while Jacksonville, Florida, and Sacramento, California, are projected to have “full” pipelines through 2023.
