Multifamily Rents in Significant Markets Show Signs of Cooling
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The national housing market is cooling off, with supply slowly starting to meet demand. Average asking prices for homes in significant markets are tumbling thanks to rising mortgage rates and the Fed’s aggressive battle to tame inflation.
A similar situation is starting to form in the multifamily sector as supply becomes more available and consumers tighten their spending. For the first time in almost two years, multifamily rents are starting to moderate yet show no signs of any significant downturns just yet.
The Palm Beach, Phoenix, Tampa, and Las Vegas multifamily sectors saw tremendous growth in 2021 but are seeing equally significant moderations now in Q4 2022.
Let’s take a closer look at why multifamily rents are slowing down as well as some other markets that are seeing significant adjustments.
Why are multifamily rents starting to slow down?
A tight labor market and speculation over a looming recession are leading many to reconsider their relocation plans. Spending power has dropped significantly for the average consumer since Q2 2022, just after peak rent growth occurred on a national scale.
Both of these factors combined give the Federal Reserve every reason to continue raising interest rates. Mortgage rates will follow suit, dropping asking prices for multifamily complexes and single-family residentials.
Expect Greater Competition Among Multifamily Owners
As a ramification of these drops in asking prices, multifamily owners in certain metros will need to stay competitive to fill units. As new multifamily projects featuring lower monthly rents are delivered to primary markets to meet demand, existing property owners will need to react accordingly.
Going into 2023, we’ll be facing a much different scenario than we saw in Q4 2020 and the ensuing quarters of 2021, where landlords were able to get away with introducing higher rents in lease renewals.
Nonetheless, the national multifamily sector is not significantly deteriorating. Despite these headwinds, rent may still grow at a slower pace in most markets, and prospective homeowners who still cannot afford a home may still resort to renting, slightly capping any increases in vacancies.
Which markets are most affected by declining multifamily rents?
The markets that have been the most affected by declining multifamily rents include:
- Las Vegas, which saw average multifamily asking rents fall from July to August and grow at one-third the pace year-over-year compared to 2021;
- Phoenix, which saw average multifamily asking rents fall by half a percentage point in September and experience one-third of the rent growth year-over-year compared to 2021; and
- Tampa, Fort Lauderdale, and Orlando, which all experienced significant slowdowns in year-over-year multifamily rents since January 2022.
The markets that have proven to be the most resilient towards moderating rents have been those located in the Midwest. These include the multifamily markets in Cincinnati, St. Louis, Detroit, and Kansas City.
Why has the midwest remained resilient?
Most of the midwestern multifamily regions in the United States lack one significant problem compared to other popular coastal markets: excess supply. New multi-family construction was off to a slow start in 2022 amidst supply chain issues and shortages of skilled laborers.
Due to this lack of excess, the midwest is now seeing similar rent growth and vacancy activity that popular coastal markets saw in 2021 and H1 2022.
As a result, the area has drawn record-breaking quantities of fresh capital and new construction projects as investor and developer attention turns to this overlooked region of the country.
What does the rest of 2022 look like for the multifamily sector?
Despite certain pockets of the national multifamily market experiencing significant slowdowns in rent growth, the rest of the year may still hold overall rent growth for the rest of the nation, albeit at a slower pace.
Most of the anticipated 2022 rent growth has already occurred, and while rent growth is not expected to stop completely until we move into 2023, such growth will come at a slower pace.
The markets that saw the most significant increases in rent growth saw some of the most significant decreases in August and into the first few weeks of fall. While this tends to be a seasonal trend regardless of economic activity, the current volatile nature of the economy has amplified these effects.
Do your research, stay diligent, and happy investing.
Methodology
All figures presented in this article are based on MyEListing.com’s commercial real estate listing data in corroboration with other freely available data and information covering the commercial real estate industry.
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