Multifamily demand is likely to remain healthy in 2024, though rent growth will be tested by decelerating economic growth and a rapid supply uptick in some markets. The higher interest-rate environment will stress property values and threatens to increase loan defaults. Yardi Matrix’s 2024 U.S. Multifamily Outlook covers those issues and much more. Below is part of Yardi Matrix’s U.S. Outlook 2024. To see the report in it’ entirety, visit www.yardimatrix.com.
- Multifamily faces a mixed outlook in 2024. Property performance remains healthy for most apartments, but challenges will come from a wave of deliveries, rapid growth in expenses, a potential economic slowdown, and the increase in mortgage rates.
- The U.S. economy has remained surprisingly resilient, helping to maintain strong demand for housing, led by robust employment growth and moderate gains in consumer spending. However, economic growth is likely to slow in 2024, due to the effects of a higher-for-longer interest rate scenario. For commercial real estate, that means a market reset with higher acquisition yields, higher financing costs, and lower leverage and values.
- We expect rent growth will be positive in 2024, but diminished by slowing absorption, supply growth and declining affordability after extraordinary gains in 2021-22. Growth will be led by metros in the Midwest, Northeast and smaller Southern and Mountain areas where demand remains consistent and deliveries are subdued. New York and Chicago will continue robust recoveries owing to strong demand and weak supply growth. Rapidly growing Sun Belt and West markets will see a temporary pause in rent increases due to the large number of units coming online, but long-term prospects remain bullish.
- Supply growth is at decades-long highs, with more than 1.2 million units under construction. Deliveries should top 500,000 units in 2024, with concentrations in rapidly growing markets in the South and West. However, the rise in construction financing is putting a lid on new starts, so 2024 is expected to be a peak year for deliveries.
- Multifamily expenses—particularly insurance but also labor, materials and maintenance—are rising rapidly. With income growth slowing, operating efficiency and cost-cutting will be focused on the industry.
- Transaction volume fell by 70% in 2023 as falling values and rate volatility created pricing uncertainty. Activity is likely to remain weak in 2024, but could rebound later in the year if rate hikes have ended. Lenders are being cautious and borrowers are reluctant to lock in loans at high rates. Maturity defaults will be a growing issue as loans come due and properties qualify for proceeds that are less than the existing mortgages.
Economy: Still Standing
Heading into 2024, the U.S. economy has remained strong, consistently outperforming consensus forecasts of an impending recession. The rapid growth should slow in 2024, but even most pessimistic prognosticators have moved into the soft-landing camp. The economy has—defying most economic models—managed to maintain growth and nearly full employment while inflation decelerates. The economy grew at a 2.6% pace through the third quarter of 2023, and the most recent GDP print came in at 5.2%. Through November 2023, the economy added 2.7 million jobs over the prior 12 months and 7.9 million jobs over 24 months. The unemployment rate was 3.7% in November and has been below 4.0% for 22 straight months. Corporate profits, more than $3 trillion in the third quarter, are near record levels. Meanwhile, the inflation rate subsided to 3.1% year-over-year through November, at 2.2% over six months, and the number is likely to continue falling in coming months when declining rent and shelter inflation are blended into the mix.
Supply: Boom While it Lasts
The multifamily market responded to the surge in demand and rent growth in recent years by ramping up the pipeline. As 2024 starts, some 1.2 million apartment units are under construction, the most since the suburban garden apartment boom of the 1980s. Yardi Matrix expects roughly 510,000 units to be completed in 2024, with new supply beginning to decline in 2025 to a still-sizable 450,000 units and bottoming in 2026 at around 375,000 units.
2024 Forecast Supply Growth by Metro
Rents – Slow Growth Ahead
Matrix forecasts a tepid 1.5% rent growth nationally in 2024 for several reasons. Perhaps the biggest reason is the growth in supply. Matrix forecasts 510,000 apartment units to be delivered in 2024, the highest number in decades. Occupancy rates slipped to 94.9% as of October 2023, which is healthy by historical standards but 1.3 percentage points lower than the peak in 2022. Renters have more options, given the growth in supply. Another reason is affordability. The average rent-to-income level in the U.S. was 29.8% in November 2023, up 270 basis points since January 2020, just before the pandemic lockdowns. More evidence of affordability issues is that rent growth in high-end Lifestyle units, which soared to 18% year-over-year in early 2022, when demand increased, has turned negative (-1.1% in November 2023). Meanwhile, demand and rent growth remain positive for working-class Renter-by-Necessity units, with rents up 2% year over-year in November.
Some Western and coastal markets—such as San Francisco, Portland, Seattle and New York—are feeling the impact of slowing demand, cultural clashes and difficult regulatory regimes that put pressure on operators. Rent control leads to reduced supply as operators either avoid the markets altogether or decide to abandon units because renovations are more expensive than income from rent.
2024 Forecast Rent Growth by Metro
Year of Challenges
Although property fundamentals are likely to hold up in 2024, multifamily faces a number of challenges that include maintaining occupancies in a slowing economy, putting a lid on expense growth and dealing with more expensive and less liquid capital markets. We are no longer in a rising-tide-lifts-all-boats market. The traditional property acquisition pipeline will likely remain stalled through most of the year, so near-term opportunities will be concentrated in debt investments and providing capital for property restructurings. The challenges are not insurmountable for owners with a long-term perspective, but they will take skill and expertise to navigate.
Yardi® Matrix offers the industry’s most comprehensive market intelligence tool for investment professionals, equity investors, lenders and property managers who underwrite and manage investments in multifamily, student housing, industrial, office and self storage property types. We provide nationwide market and institutional research reports that leverage property-level details of multifamily properties. Yardi Matrix also uses data in the Yardi property management system stack to create aggregated and anonymized operating expense, revenue, and operational metric data that improves underwriting analysis and competitive benchmarking.
The Yardi Matrix apartment information service is a high-performance system with the sole function of supporting the commercial apartment industry’s dominant participants. The company’s services monitor the 50+ unit apartment universe from the property level to the submarket/market level in a form unique within the commercial apartment information industry. For more information, visit www.yardimatrix.com. Reprinted with permission.