Following a remarkable year for housing completions in 2023, the trend continues strong in 2024. The multifamily market, in particular, has seen a significant increase in completions, which is impacting rent growth and landlord profit margins. According to the latest data from the U.S. Census Bureau and the Department of Housing and Urban Development, June 2024 saw a substantial increase in multifamily housing completions, marking the highest seasonally adjusted annual rate for such completions since September 1974.
Rising Completions and Profit Margin Pressures
Multifamily housing completions in June 2024 reached an impressive seasonally adjusted annual rate (SAAR) of 656,000 units, a 26.2% increase from the previous month and a 40.2% rise year-over-year. This surge is part of a broader trend that has seen elevated levels of completions over the past several months. While this influx of new units helps address the ongoing housing shortage, it also contributes to increased competition among landlords, putting downward pressure on rent growth.
Rising operating expenses have compounded the issue for multifamily landlords, eroding profit margins. As operating costs climb, landlords are finding it challenging to maintain profitability despite the influx of new units.
Impact on Rent Growth
Moody’s CRE recently revised its forecast for multifamily asking rent growth in 2024, reducing it to the low- to mid-1% range. This adjustment reflects the increased supply and heightened competition in the market. As of the second quarter of 2024, asking and effective rents increased by only 0.3% quarter-over-quarter, reaching $1,838 and $1,746, respectively. These figures are virtually unchanged from 2022 levels, underscoring the stagnation in rent growth.
A notable trend is the widening gap between asking and effective rents, which remained above $90 for the third consecutive quarter. This divergence highlights the growing importance of concessions in leasing activities as landlords seek to attract and retain tenants amid increased competition.
The Housing Shortage and Future Prospects
Despite the surge in completions, America’s housing market continues to grapple with a significant shortfall. As of May 2024, Moody’s estimated a housing shortage of at least 1.9 million homes. This deficit includes 1.3 million homes from single-family (838,000) and multifamily (466,000) properties, with the remaining 600,000 attributed to pent-up household formations due to affordability issues.
The broader economic context also plays a role in shaping the multifamily market. As the office sector anticipates relief from rising rates following positive CPI reports in June, multifamily landlords similarly await easing supply conditions and stabilization in operating expenses to alleviate profit margin pressures.
Analyzing Operating Expenses
To gain a deeper understanding of the impact of rising operating expenses on multifamily properties, Moody’s analyzed over 3,500 apartment properties within the CMBS universe. The findings, detailed in the report It Is Not All About Insurance: Navigating Through Major Expenses for Multifamily Properties, highlight the most affected line items and provide valuable insights for landlords navigating these challenging conditions.
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