The multifamily real estate market is beginning to show significant momentum, indicating a positive shift after facing several challenges in recent years. Factors such as rising interest rates, increased construction, and fluctuating demand had caused many investors to tread cautiously. However, recent data suggests that the tide is turning in favor of buyers and investors, as lower debt costs and higher cap rates are creating opportunities for growth. This shift could be a game-changer for those who have been waiting on the sidelines, hesitant due to financing hurdles and softer market fundamentals.
According to Marcus & Millichap’s third-quarter national multifamily report, the average multifamily capitalization (cap) rate between July 2023 and June 2024 rose to 5.8%, marking a 110-basis point increase from the all-time low seen in 2022. Not only is this the highest cap rate since 2014, but it also signals that the multifamily market is on the path to recovery. Higher cap rates provide investors with more favorable returns on their investments, making the current landscape more attractive for those looking to buy. Coupled with stabilizing sale prices, the multifamily sector is poised for increased activity in the months to come.
A Return to Activity
One of the most encouraging trends is the growing re-engagement of institutional investors. After a period of reduced activity, this segment of the market saw dollar volume rise in both July and August 2024. This return to action suggests a renewed confidence in the multifamily space, driven in part by stabilizing vacancy rates and improving fundamentals.
Vacancy rates across the U.S. remained flat during the first half of 2024, after increasing by 90 basis points in 2023. While vacancy in primary markets has shown the most stability, particularly in downtown urban areas, other regions are experiencing milder supply pressure. Cities outside of the Sun Belt, such as Chicago, Cincinnati, Cleveland, Milwaukee, Pittsburgh, and St. Louis, have benefitted from inventory expansion below 2%. These locations have experienced steady rent growth as a result of limited new construction, making them attractive for multifamily investors seeking stable returns without the risk of oversupply.
Despite the overall flatness in vacancy, the multifamily sector has shown robust absorption rates. During the first two quarters of 2024, the net absorption of nearly 260,000 apartments exceeded the entire previous year’s absorption by 35,000 units. This surge in absorption is largely attributed to a rise in household creation, coupled with cooling inflationary pressures. National vacancy held at 5.8% at the start of the second half of 2024, signaling sustained demand for multifamily units despite ongoing construction activity.
Supply Pressure and Its Impact
While demand remains strong, supply pressure continues to be a key factor shaping the multifamily market. With approximately 1 million units currently under construction across the U.S., developers have been working at a historic pace. This influx of new units has created a headwind for vacancy rates in certain markets. However, there are signs that this trend is beginning to slow down. Multifamily project starts dropped by more than 18% year-over-year in July 2024, while permits decreased by 15%. This suggests that the construction boom may have peaked, which could alleviate some of the supply pressure in the near term.
One consequence of the increased supply is the rise in concessions offered by operators. In August 2024, the share of apartments offering discounts jumped to 14.1%, up more than 500 basis points compared to the previous year. While concessions have leveled off among Class A properties after peaking in March, Class B and C apartments continue to offer discounts in an effort to stay competitive. This trend reflects the ongoing competition in the market as developers and landlords work to fill newly constructed units.
Rent Growth and Tenant Preferences
Interestingly, while rents for new tenants have seen some declines, lease extensions are telling a different story. Annual rents for lease extensions grew by 4%, compared to a 0.8% drop for new tenants. This highlights a growing trend of renters choosing to stay in their apartments rather than moving. With first-time homeownership increasingly out of reach for many, apartment renewals have become more attractive. The share of U.S. households that qualify for a median-priced home loan from Freddie Mac fell to just 26% in the second quarter of 2024, down from a trailing-decade average of roughly 46%. As a result, the apartment renewal conversion rate hit 54.9% in August, marking a 150-basis point increase year-over-year.
This trend speaks to the shifting dynamics within the rental market. As the barriers to homeownership grow, more renters are opting to stay put, creating stability for multifamily operators. At the same time, the demand for affordable, well-located rental housing remains strong, further solidifying multifamily properties as a resilient investment choice.
A Positive Outlook for Investors
In conclusion, the multifamily market is showing signs of resilience and recovery, with positive momentum expected to continue into the latter half of 2024. Lower debt costs, higher cap rates, and stabilizing sale prices are all contributing to a more favorable investment environment. Additionally, while supply pressure remains a concern, the slowdown in new construction starts suggests that the market may soon find a better balance between supply and demand.
For investors who have been waiting for the right time to re-enter the market, the current trends indicate that the multifamily sector is on the path to long-term growth. With vacancy rates stabilizing, rent growth among lease extensions, and strong demand for rental housing, now may be an opportune time to explore opportunities in multifamily real estate.
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