Expensive Metros Regain Lead Over Hot Metros in Q3
During the pandemic, more units were absorbed in newly popular markets than in high-priced CBDs, according to Moody's Analytics.
Moody’s Analytics preliminary third quarter data show signs of a modest deceleration in the once rapidly expanding multifamily sector. While new construction deliveries fell short amid stubborn supply chain and labor challenges, net absorption—the change in occupied stock—also came in low at slightly more than 21,000 units nationwide, in stark contrast to the 84,040 units for the first half of the year (or average of 42,020 units/quarter).
Expensive vs. Hot Metros
Hot Metros
The top 25 percent of metros that experienced the quickest market rent growth from Q2 2020 to Q3 2022.
To understand how the apartment demand was distributed at the metro and submarket level, we segmented our 82 primary multifamily metros into three categories: Expensive, Hot, and Others, based on their pre-pandemic market rent and pandemic market rent growth. Prior to the pandemic, Expensive metros and Hot metros were each taking up roughly 25 percent of the total net absorptions. The pandemic drastically changed this distribution. In early 2021, only 17 percent of the total net absorption belonged to Expensive metros but over 30 percent for Hot metros, which is aligned with the general population migration pattern. That trend, however, was short-lived and soon reversed later in the year as overall apartment demand picked up. As we closed the Q3 of 2022, Expensive metros regained popularity with over 30 percent of the total net absorptions while Hot metros had a lackluster 23 percent of the share.
Expensive Metros
The top 15 metros with highest market rent in Q2 2020.
Furthermore, we looked into the demand dynamics in the city center (CBD) vs. the suburban areas. Generally speaking, Expensive metros have higher shares of net move-ins in the CBD area than the Hot metros. And as shown in the chart, the CBD shares of total net absorption in Expensive metros and Hot metros were mostly moving in lock steps before 2021. As multifamily market quickly rebounded from its pandemic lows, people not only regained interest in the Expensive metros but also showed their incredible loyalty to the urban lifestyle. The shares of CBD net absorption diverged between the Expensive and Hot metros after their paths crossed in Q4 2021/Q1 2022, which eventually led to Expensive metro’s CBD share of net absorption reaching nearly 50 percent while Hot metros were teasing below 10 percent for the first time over the past five years. Construction delivery and market rent growth also followed similar divergence, demonstrating the resilience of Expensive metros’ CBD multifamily markets, while also showing potential signs of a waning residential interest in Hot metros’ CBDs.
Lu Chen is senior economist, Moody’s Analytics.
