Demand Metrics for Multifamily Generate Better Than Expected Performance
While all eyes have focused on the strength of the supply pipeline in the multifamily sector, the demand side of the equation delivered a strong first half of the year, according to Sam Tenenbaum, head of multifamily insights for Cushman & Wakefield. Approximately 230,000 units were absorbed during the first half of 2024, which was 75% more than the first half of 2023. The second quarter saw the fourth most demand of any quarter since at least 2000.
“The multifamily sector is more resilient than people thought,” Tenenbaum says. “We delivered more units than we absorbed in the first half, but robust demand has certainly surprised many. The vacancy rates anticipated last year haven’t materialized thanks to that strong demand. In fact, vacancy rates fell 10 basis points during the first quarter of the year for the first time since 2021.”
“We still need time to see whether we’ve reached the peak of vacancy rates,” Tenenbaum says. “But even flat vacancy rates are a good sign given the amount of supply we’re seeing.”
In addition, rent growth has remained in positive territory for the first half of 2024 on a national basis.
“To get back to pre-pandemic sector performance, we need to see vacancy rates decline, rather than just flatten,” Tenenbaums says. “Absorption rates have improved, but this is an early sign that we may have turned the corner.”
Regional Patterns
The Midwest is clearly the outperformer so far in 2024.
“Investor attention shifted, especially during the pandemic (and before that as well), to the Sunbelt to follow population growth and Covid migration waves,” Tenenbaum says. “Investors bypassed the Midwest, which really set that market up for outperformance for the next few years. They just don’t have the supply that you see in other markets.”
However, while the South has the most supply under construction, it also has the most demand.
“Last year, major markets in the Southern part of the U.S. added 811,000 people,” Tenenbaum says. “The next fastest growing region in the country was the West, which added a little under 100,000 people. So, the South saw eight times more population growth in the cycle than any other region.”
Texas continues to see outsized population growth, with 34% of all population growth in major markets represented by Dallas and Houston alone.
Development Dynamics
In any location, the decision to start new multifamily developments depends on a variety of factors, particularly interest rates and rent growth, Tenenbaum says.
“Rents need to be high enough to justify the construction costs,” he says. “Construction costs haven’t come down meaningfully and interest rates are still elevated, so construction is still challenging.”
Multifamily starts declined 6.6% in May 2024 compared to May 2023 to an annualized pace of 295,000 units, the lowest pace for apartment construction since April 2020, according to the Census Bureau.
In 2023 construction starts were down about 35% compared to 2022.
“We were building between 300,000 and 400,000 units annually from 2015 to 2020, so multifamily starts just under 300,000 units don’t represent falling off a cliff,” Tenenbaum says. “There are still units coming to market, but the influx to the pipeline is declining.”