Rapid Multifamily Inventory Growth Does Not Have to be Bad News

Record level multifamily construction was expected for the United States this year, but that isn’t always bad news for a market. If vacancy inches up as a result of slight oversupply but average effective rent goes up more due to rent catch-up/higher operating expenses/cost of capital, effective revenue (calculated by effective rent x occupancy rate) growth can still turn positive.

Over the first half of 2023, 25 US metros had recorded more than 0.5 percent of multifamily inventory growth but 40 percent (10 of 25) of them did not experience effective revenue decline as shown in the Positive Impact table below.

Source: Moody’s

Source: Moody’s

These 10 metros are scattered across the nation and therefore their effective rent growth is not quite explained by any geographical reason. In most cases (except for Palm Beach), those metros’ year-to-date inventory growth turned out to be slower than their respective average half-year inventory growth between 2019 and 2022. Due to strong multifamily demand in Palm Beach, Northern New Jersey, and Milwaukee, their multifamily vacancy slid 10-20 bps since beginning of the year. Nine of the 10 metros have experienced effective rent increase ranging from 0.9 percent in Denver to 4.3 percent in Tacoma, except for a mild 0.1 percent decline in Milwaukee which however was saved by more notable vacancy decline.

Lu Chen is associate director and senior economist for Moody’s Analytics.