Apartment Vacancy Rates Hold Steady As Multifamily Demand Nearly Matches Supply

Article originally posted on CoStar on July 31, 2024

Multifamily demand expanded during the second quarter as 170,000 more units were rented than vacated, the highest total since the third quarter of 2021. And while 180,000 new units also came on line, this was the smallest supply-demand gap in 11 quarters.

As a result, the national vacancy rate held steady at 7.8% from the first quarter through the second quarter. This is the first time apartment vacancy hasn’t risen in almost three years, and vacancy is forecast to hold steady through the end of the year.

Likewise, we’re seeing signs that rent growth deceleration has halted. National rent growth finished the second quarter exactly where it started: 1.0%. Annual rent growth has hovered around the 1% range since mid-2023. This represents a dramatic change from the rapid pullback in rent growth that started in 2022. Additionally, the narrowing of the supply-demand gap could set the stage for rent growth to begin to accelerate in the third quarter.

Before and during the pandemic, the fastest rent growth occurred in Sun Belt apartments. However, record levels of multifamily construction resulted in a significant deceleration of rent growth across that region starting in 2022, which led to the Midwest becoming the regional rent growth leader, with the Northeast not far behind.

The Midwest and Northeast did not see the explosion of new supply that took place in Sun Belt locations, which has kept supply and demand in their markets better balanced. Midwest and Northeast markets have an average annual rent growth of 2.5%, while Sun Belt markets posted a cumulative drop of 1.3%. However, rent growth should begin recovering for all regions in the second half of this year, and it is expected to accelerate further next year.

Overall, apartment demand has been strong during the first half of the year, and the stage appears set for market stabilization to begin moving into expansion in the months ahead, at least at the national level. However, the economy has yet to achieve a full soft landing and while the Federal Reserve is expected to cut interest rates later this year, they remain at an elevated level.

The higher interest-rate environment represents a continued downside risk for multifamily fundamentals at a time when supply and demand appear to finally be coming back into line.