What’s Next for Multifamily Concessions?

More than one in five professionally managed apartment units across the nation offered concessions in the second quarter of this year. This marks a sharp year-over-year increase, but still below the averages seen during the two previous economic growth cycles, according to Berkadia’s U.S. Apartment Concessions report.

The concessions drive is partly due to increased competition from single and multifamily completions. In areas of higher supply, more owners and operators looked to concessions as a means of attracting new renters, the report noted.

Yet, the trend may be shifting. With a slowdown in home and apartment deliveries and a projected increase in net absorption, the report suggests that the rate of multifamily units offering concessions could drop by some 120 basis points in the second half of 2024.

The impact of interest rates

Excelsa Properties Managing Director David Fletcher told Multi-Housing News that high construction loan interest rates have curtailed new multifamily starts in all markets, including those that are oversupplied.

“Heavy concessions remain where desperate developers struggle to stabilize the market by undercutting it,” Fletcher said. “Because the oversupply wave is ending, developers in lease-ups are becoming more rational, so heavy concessions and undercutting in the Class A space are growing less frequent.”

Class A sales prices have also rebounded since the end of 2023 and the beginning of 2024, Fletcher noted. Therefore, optimally priced rent is needed to maximize new development exits, also reducing overall concessions.

For operators who overpaid and financed acquisitions with risky high-yield debt, pricing tactics like concessions have been popular. But Fletcher said that as lenders step in and force sales or rationalize operations, operators are less able to offer these high concessions.

Robert Martinek, director at EisnerAmper, similarly told MHN that tighter lending standards over the past 12 months have led to less projects in the pipeline and slower construction. “With fewer units coming online in 2025, I expect that concessions will lessen in mid-2025,” he said.

NYC’s inventory shortage

According to Brian P. Hourigan, senior managing director and director of professional development at BOND New York Properties, LLC, the New York City housing market is unique among its peers because of its severe and worsening inventory shortage.

“Concessions in the low to mid-market price ranges tend to be negligible, especially in the traditionally more competitive summer months, where the vacancy rate in many core Manhattan neighborhoods hovers around 1.3 percent to 1.7 percent,” he stated.

However, as the market softens in the cooler months and the vacancy rate creeps up to 2.5 to 3 percent, Hourigan noted that some concessions, including the landlord covering the brokerage fee and or waiving a combination of free rent and building amenity fees, etc., become a bit more common.

“Disproportionately, the highest percentage of concessions are offered in the full-service luxury market and new development sectors, where management companies are eager to lease up a comparative glut of inventory to a financially specific, and limited, target audience at the most aspirational prices to achieve rent rolls that meet or exceed the lofty projections shared with banks and investors before a new development launch,” he said.

Regardless of the rental cycle, Hourigan stated that these one-time concessions are preferable to providing larger rent negotiations for many developers. He estimated they could take place in one-third of transactions, maybe more.

Stan Broekhoven, investment sales broker, Keller Williams New York City, told MHN that one in five offering concessions sounds right in his market—the Tri-State area.

“The rental market is softening because of the low season and lower demand,” Broekhoven said. “Landlords are offering concessions to keep the gross rent at past high levels. Tenants are faced with an increase in the gross rent when they renew. Also, several new large buildings opened up, bringing more inventory to the market.”

On the rise in Raleigh

In Raleigh-Durham, N.C., concessions such as a free month of rent and discounted rent rates have become more popular. While concessions at Class A multifamily properties have declined since their highs in December 2023, Avison Young data shows that concessions at B and C properties have grown year to date in 2024.

“The Raleigh-Durham market has experienced a boom of new multifamily developments over the past few years, resulting in a plethora of inventory for tenants to choose from,” Avison Young’s Kyle Gonzalez told MHN. “As such, the level of concessions has risen to attract and retain tenants, but the number of concessions varies by asset class.”

Class C provides the highest concessions as a percentage of rent, at an average of 9.2 percent, followed by Class B with an average of 7.1 percent. As recently as May 2023, Class B had concessions of only 3.5 percent on average, showing a large change in demand for units in buildings that are not top-of-the-market.

“Tenants in the Class C area are price shopping more than other asset classes because rent is often their biggest financial burden, therefore resulting in the highest concessions as a percentage of rent than any other asset class,” Gonzalez said.

Avison Young’s David Zipparo told MHN that the other factor to consider is the location of these assets—desirable locations result in higher rents and fewer concessions.

“Class A product in unproven locations is seeing slower lease-ups and higher concessions than in a prime neighborhood,” he said. “The most common concession we’re seeing in the market right now is free rent ranging from one to two months, but we’ve also seen gift cards up to $1,000 when you sign a lease by a certain date, reduced or waived application fees or reduced rent.”

Concessions peak in Philly

Dustin Salzano, chief financial officer, U.S. Development, LLC, told MHN that the rate of communities offering concessions in Philadelphia could be higher. “If you are leasing a new building, you are likely offering one or two months free rent on a 13- to 24-month lease to remain competitive with the other new inventory,” he said.

Salzano believes that the industry has hit the peak and we will start to see a gradual reduction in the number of concessions offered by property owners. From 2021 to 2023, Philadelphia’s new permit issuance was up approximately 70 percent per year compared with 2016 to 2020. In 2024, it is on pace to be 40 percent below the new construction starts compared with 2016-2020, he said.

“A major reduction in new starts will allow the excess inventory to be absorbed, which has been happening at an impressive rate despite the new inventory glut,” Salzano noted.

The apartment boom in Philadelphia was driven largely by City legislation changes that brought about reform to the area’s 10-year property tax abatement. As a result, many developers rushed to pull permits and lock in maximum tax benefits by the end of 2021. “Now that there is an inadequate wave of new inventory behind this, we will start to see the concessions fall off in 2025, and I expect to start seeing rent increases perpetuate in 2026,” Salzano said.

Karlin Conklin, principal, co-president & COO, Investors Management Group, told MHN that strong operators will be those who “shift their focus from short-term incentives to providing long-term value and exceptional customer service to stay competitive.”

Florida’s significant supply growth

Jeff Klotz, CEO and founder of Klotz Group of Cos. in Jacksonville, Fla., operates in the Southeast and Sun Belt. He told MHN that one in five apartment transactions taking place with a concession sounds light and that the rate is increasing in most markets.

“Our area has experienced significant growth over the last few years,” he said. “I expect to see concessions offered in these markets unless something unusual is in a particular submarket, such as barriers to entry, development moratoriums, etc.”

For now, many Sun Belt and Southeast markets have softened. New deliveries are coming online into already high-supply spaces. And in some areas, migration has slowed. “Once the existing inventory is absorbed and the supply versus demand is balanced again, concessions will be less necessary,” Klotz said.

In South Florida, Matthew Jacocks, principal at Lee & Associates, told MHN that concessions are based on product type and depend on new project deliveries within a specific market.

“Depending on new projects in the lease-up phase, what is the saturation level?” he asked. “Concessions will be more of a strategy to stabilize a project quickly but will decline once a target occupancy is reached. This temporarily could trigger other competing projects to offer incentives.”

Targeted concessions in San Francisco

David Blosser, director of leasing at Veritas, said that its leasing subsidiary RentSFNow applies incentives or concessions in a targeted fashion within its San Francisco, Oakland and Los Angeles portfolios.

“While RentSFNow’s advertised incentives—such as one-time gift cards and a $95 move-in special—are offered primarily in select, more challenged neighborhoods, these promotions are used strategically to maintain leasing momentum and address specific market needs,” Blosser told MHN.

Instead of broad-based concessions, this more targeted approach is used to stabilize occupancy rates while also enhancing the resident experience. “We can attract new tenants without compromising rent growth or over-relying on incentives,” Blosser said.

Across markets, the reasons for offering concessions might vary. But at its core, key metrics like occupancy and rental growth are driving operators and owners to offer these incentives.

The Berkadia report shows occupancy to be one of the largest factors in an increase in the share of apartments using concessions. In the second quarter of this year, occupancy rates stood at 94.2 percent, a 50-basis-point year-over-year decline.

And while there are other ways to attract residents without concessions, it can be an effective approach.