Higher Vacancy, Steady Demand for Multifamily

Cushman & Wakefield’s midyear report shows resilience as well as a mixed bag.

Sam Tenenbaum

Sam Tenenbaum. Image courtesy of Cushman & Wakefield

Multifamily is continuing to demonstrate strength throughout the halfway point of this year, a U.S. National Multifamily MarketBeat Q2 2023 Cushman & Wakefield report shows. However, not everything is trending upwards, as vacancy rates increased for the eighth straight quarter. While overall conditions have weakened since 2021, there is resiliency in the markets.

Sam Tenenbaum, head of multifamily insights at Cushman & Wakefield and the author of the report, told Multi-Housing News that the increase in vacancy rates is partly due to high unit deliveries and close to a million more apartments under construction. “Our expectation is for supply to continue outpacing demand next year.”

The numbers point toward strength

By the numbers, multifamily largely looks good. In the second quarter of this year net absorption increased by 64 percent quarter-over-quarter and 62 percent year-over-year to 85,235 units, the report shows. On the contrary, vacancy rates increased again for the eighth straight quarter to 7.5 percent. While vacancy rates did climb, multifamily has been experiencing extremely high delivery numbers with 114,000 units hitting the market in the second quarter of 2023.

Annual rent growth numbers have shown an increase of 1.5 percent year-over-year and 2.2 percent year-to-date. It is likely that rental growth will continue to look weak as economic volatility factors in, however, year-to-date rental growth is so far largely mirroring the average of 2.4 percent over the last eight years. Further, negative seasonal rental demands are expected to regulate after reaching dramatic heights last year.

“In 2022 there was effectively twice the normal amount of seasonality to make up for the year before,” said Tenenbaum. “There will be some hiccups in the second half of this year in certain markets and certain submarkets but broadly speaking we expect more normal seasonal trends to take hold in 2023.”

Where multifamily is thriving

In the second quarter of this year, overall vacancy rates were slightly higher in the South and West regions when compared to the first quarter of 2023, as opposed to the Northeast and Midwest that stayed the same. Tenenbaum explained to MHN that most of that is attributable to new supply.

“In the South in particular there have been a lot of markets in really high demand,” he said. “However, they’re also typically higher supply markets and as a result, even if you have at the national level the third best quarter outside of the pandemic boom for apartment demand, there were still more deliveries that ultimately slightly drove vacancy.”

The Midwest continues to demonstrate resilience, topping the charts with year-over-year rent growth. Of the 90 markets the report tracked, Madison, Wis., Knoxville, Tenn., Fargo, N.D., and Omaha, Neb., ranked highest in rent growth.

Factors weighing in

Financing for multifamily is proving difficult as banks are reluctant to make what they perceive to be risky loans. Considering construction loans are often thought of as riskier than acquisition financing, Tenenbaum anticipates the next year will continue to be challenging when it comes to financing multifamily development.

“The factors that are effecting construction today are the same factors that are affecting the investment sales market, namely higher debt costs,” said Tenenbaum.

As with any property type, high interest rates and recent bank failures are causing strain. As a result, many homebuyers are being priced out of the markets. High interest rates and the challenges facing the single-family market are creating a great number of opportunities for multifamily.

“Historically, the principal and interest payment of a mortgage is much cheaper than overall rent. To buy a home you have taxes, insurance, upkeep and all of these things that you’re responsible for,” Tenenbaum explained. As of the second quarter of 2023, the principal and interest portion of the mortgage payment was some $400 more expensive than a rent payment, before you take into account additional fees, said Tenenbaum. These numbers are playing a big factor, alongside other variables, in the sustained demand and resiliency of multifamily.

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