The United States multifamily market experienced significant changes and trends in the third quarter of 2023. In this report, we will delve into the main points that shaped the market during this period.
The Spread between Renting and Owning
One of the noteworthy findings in the third quarter was the acceleration of the spread between renting and owning. It increased by 15.4% quarter-over-quarter, resulting in a remarkable $994 savings in rent. This widening gap can be attributed to the surge in home prices and record-level interest rates. Consequently, renting remains a more economical option compared to owning a home.
Rising Demand and Top Markets
During the third quarter, demand for multifamily units rose to 91,000 units, marking a 12.7% increase quarter-over-quarter. The second and third quarters are typically characterized by strong leasing activity, and 2023 was no exception. In comparison to the previous year, which saw negative absorption of 148,000 units, 171,000 units were absorbed in 2023. The top three markets driving this demand were Houston, Dallas/Ft. Worth, and Austin, accounting for 30.3% of the overall demand in the United States.
Record-Breaking Deliveries and Inventory Growth
The third quarter of 2023 witnessed a record-breaking delivery of over 128,000 units, the largest quarterly sum on record. This trend is projected to continue, with several more quarters expected to surpass this record. Inventory growth stood at 2.1%, which is 70 basis points above the long-term average. Looking ahead, it is anticipated to climb to 3.4% throughout 2024. Notably, new supply outpaced demand by 278,000 units in the third quarter of 2023, indicating a significant improvement compared to the first quarter of the same year.
Rent Growth and Regional Variation
Rent growth experienced a modest increase of 0.5% on a quarterly basis, while year-over-year growth contracted to 0.4%. This marks the sixth consecutive quarter of declining annualized rent growth, reaching a 10-quarter low as of the third quarter of 2023. However, renewals are outperforming new lease trade-outs by 430 basis points, indicating relative stability in the market. Northeast and Midwest markets, particularly Newark and Cincinnati, emerged as the top performers in terms of rent growth, with growth rates of 4.9% and 4.5%, respectively. On the other hand, growth markets in the Sun Belt experienced the largest year-over-year decline.
Multifamily Expenses and Lending Trends
Multifamily expenses witnessed an 8.1% year-over-year increase, primarily driven by a substantial surge of 25.4% in insurance costs. Other expenses, including management, also saw double-digit year-over-year growth. This upward trend in expenses poses challenges for landlords. Coastal markets, such as Charleston, Orlando, and Tampa, recorded the highest increase in year-over-year expenses, largely due to significant insurance growth of 38.0% or higher.
In terms of lending trends, there has been a sharp increase in the share of multifamily finance by government-sponsored enterprises (GSEs) in 2023. Conversely, the share of lending by banks and CMBS/CRE CLO has contracted. Debt funds lending share has declined slightly but remains above pre-pandemic levels. The stability provided by GSEs has played a crucial role in improving the finance markets.
Debt Maturities and Investment Sales
Between 2023 and 2025, approximately $682 billion in multifamily loans is set to mature. Banks account for 32% of debt maturities in the full 2023-to-2032 period, with a higher concentration of 52% in the 2023 to 2025 timeframe. Debt fund maturities and securitized lending also follow a similar frontloaded pattern. It is concerning that these lending sectors have experienced reduced activity in recent times.
Price dislocation and an elevated interest rate environment continue to hinder the investment sales market. In the third quarter of 2023, quarterly sales volume declined by 61.7% year-over-year, reaching $30.1 billion. Despite the decrease in market share since 2022, multifamily remains the largest share of investment sales among all US commercial real estate property types, accounting for 32.4% year-to-date.
Multifamily as a Resilient Asset Type
Multifamily has proven to be a resilient asset type for investors, especially in the years following the Global Financial Crisis and the COVID-19 outbreak. It has consistently generated higher returns compared to other property types. Although multifamily returns declined in 2023, this asset class remains a defensive and less volatile option, outperforming the broader property index.
In conclusion, the United States multifamily market in 2023 experienced notable shifts in rental affordability, rising demand, record-breaking deliveries, and varying rent growth rates across regions. Additionally, expenses and lending trends shaped the market landscape, while debt maturities and investment sales faced certain challenges. Despite these dynamics, multifamily continues to be an attractive and resilient asset class for investors.
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