As homes become even more unaffordable with rising mortgage rates and resulting crushed application volumes, you might think that demand for apartments would be screamingly hot. And it is—or was until the third quarter. The story coming out a Newmark report is surprising, because it suggests a possible sea change in how multifamily has been performing.
“Following extraordinary property level fundamentals in 2021, quarterly absorption posted net negative demand of 82,035 units nationally in the third quarter of 2022, during the historically active leasing months of July, August and September, where absorption was negative,” the report states. From huge demand to negative absorption at a time that is usually the opposite.
There was a 400,000-unit housing shortfall last year—unclear whether Newmark is combining homes and apartment units there—and that gap “has resulted in an annual average effective rent growth of 13.5% as of the third quarter of 2022, 1,070 basis points above the long-term average.”
The stunning number is an outgrowth of need. But while long-run apartment vacancies are near 3.1%, looking at twelve-month trailing figures, according to Newmark, “quarter-over-quarter vacancies have risen 90 basis points as demand has trailed off recently.” That is an incredible recent change. Look at Class A and B separately and the figures are 194 basis points and 200 basis points.
Multifamily loan originations dropped off significantly in May, and given roiling in credit rates, that’s not surprising. “While multifamily remains the most sought-out property type, accounting for 41.7% of all US commercial real estate year-to-date, sales volume in the third quarter of 2022 declined 17.2% year-over-year, to $74.1 billion,” added the report.
There is ongoing whipsawn volatility and no clear explanation of why. Here are some possibilities, though. One is that people are tired, they chased off to other places during the pandemic and they’re tired of relocating. That’s one possibility.
Looking at the Class A and B figures, there could be a big issue with rents that went to the moon and beyond. People might be living more with roommates or family and backing away from their own apartments for now, creating more vacancies because new units have been under construction.
Perhaps it’s all a statistical anomaly. Newmark notes, “Compared with the first three quarters of 2021, sales volume has increased 25.0% and deal size continues to escalate.” Maybe the deals are out of sync with demand.
Whatever the case, it suggests big perturbations in the multifamily market that investors, developers, and owners will have to monitor and navigate.