As multifamily wraps up 2023 and heads into 2024, it is no secret that most of the industry feels an underlying anxiety about the new year, especially with the rapid increase in new units that are coming online. As Elizabeth Francisco put it in our latest market update webinar, we are confronting a complex mix of headwinds and tailwinds, setting a stage that requires insightful management and strategic agility.
In 2024, it's not cautious optimism that will serve operators best, but rather a sustained state of alertness. So, let’s assess the current market, its direction, and the optimistic horizon operators can hold onto.
Apartment demand definitively improved in Q3 of 2023, securing net absorption of more than 75,000 units which was the best quarterly performance since Q4 2021. However, Q3 of 2023 also saw another 100,000 new units delivered, so demand is not as strong as it needs to be to absorb all of the units coming online.
With the rapid increase of supply, national average occupancy rates have consequently dropped to a five-year low, dipping below 90%, according to ALN Data. Additionally, average rent for new leases declined by 0.4% in October. While that might sound ominous, it is only a marginal difference in comparison to other declining months in recent years.
Moreover, if we examine the seasonal trends over the last three years, there’s a noticeable year-over-year decline during Q4 from the summer’s peak leasing period. This pattern suggests that, going into 2024, monthly rent growth could continue to face challenges, potentially unable to shift away from this downward trajectory, largely because of the supply pressures weighing on occupancy rates.
The return of rental concessions began in the back half of 2022 when the market first reflected negative rent growth. As supply spiked and occupancy dipped, we saw growth in lease concessions in 2023 with 16% of conventional properties offering a discount for new leases up through the start of Q4 2023.
As multifamily owners and operators finalize their 2024 strategy and budget, they would be well served to consider the more personal side of our economic landscape — the financial well-being of our residents. Key indicators such as Real Disposable Personal Income (RDPI), employment trends, and savings balances don't just represent numbers, they signify the stability and resilience of our renters in the face of their own economic headwinds. With 2024 on the horizon, there are critical indicators that will shape our approach to sustaining tenancy and community in uncertain times.
Given that RDPI was at a historic high of $20,422 in March 2021, driven by factors such as stimulus checks and enhanced unemployment benefits, the subsequent decline to $16,751 in September 2023 still reflects a higher income level compared to December 2019 ($15,684). This suggests that despite the withdrawal of government support, consumers have more purchasing power than they did pre-pandemic, which is a positive sign for the multifamily market.
Asset owners and managers can take some solace in this, as it indicates a generally stable economic foundation for their tenant base. However, they should remain vigilant as even a "normal" level of income can be fragile in an uncertain economic climate.
We continue to see stability in employment with a labor force participation rate hovering around 62.8% and an unemployment rate at 3.8%. These figures suggest a healthy job market, which traditionally translates to reliable rent payments for our industry. However, we should always take in a broader economic context.
There are still indicators of financial vulnerability among consumers. Loan payment delinquency has continued to rise since 2021, with a spike in 2023 that resulted in higher delinquency percentages than pre-pandemic numbers. Additionally, and as of today, 71% of Americans have $5,000 or less in their personal savings and 41% of Americans have $500 or less in savings. This lack of cushion exposes renters and potentially the multifamily market to risk in the event the economy starts to suffer.
Ultimately, the overall current economic indicators aren’t definitively headwinds or tailwinds but could go either way depending on how stable the economy remains.
All in all, the hurdles of 2024 are laying the groundwork for a more flourishing and dynamic 2025 and 2026. The multifamily market, which is historically dynamic and self-regulating, often swings toward over-correction in its path to stability. While it may introduce short-term uncertainties, this natural market fluctuation will assuredly cushion long-term growth prospects, driving rent increases, higher occupancy rates, and compressing cap rates in the following years.
CoStar’s forecasts indicate rents are headed for a bit more of a tumble in 2024, but that is only part of the overarching and long-term story. Rents are expected to keep growing as they do over time, hovering around a 4% national rent growth in 2025 and beyond. As we venture out to 2025 and 2026, these numbers are setting the stage for what will likely be a strong comeback and a potential rebound as the market continues to correct itself.
The industry trade associations estimate an additional demand of 4.3 million units through 2035. So, while multifamily might be buckling up for near-term bumps, they will also want to prepare for a steady climb and return to profitability and growth once again in the long run.
The upcoming year is set to be a year of learning and opportunity, particularly for those who have yet to experience the rigors of managing assets in a less-than-ideal economic climate. However, history teaches us that the market has a remarkable capacity for self-correction, often even overcorrecting before finding a more balanced path forward.
As we've emphasized from the start, those who approach their asset management with diligence and a proactive mindset will be equipped to adjust their strategies effectively in response to market shifts.
The coming 12 months are not just a series of obstacles to overcome, but a landscape rich with opportunities for those prepared with the right tools, insights, and perspective.
Stay tuned for our upcoming blog on how you can remain proactive in a downward market.
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