Rent Growth Will Moderate vs. Historical Averages
Freddie Mac, one of the nation’s biggest buyers of multifamily mortgage loans, predicts that multifamily rent growth across the United States will increase by 2.5% in 2024, with declining rents in certain markets that are experiencing pressure from new supply. Freddie Mac’s forecast of 2.5% rent growth nationwide is slightly below the annual average nationwide rent growth for the past two decades. But Freddie Mac is bullish long-term
In the short term, The biggest wave of new apartment supply in decades will temper rent growth and improve affordability for renters. 440,000 new units are expected to deliver in 2024, and there are more than 900,000 units currently under construction. Sunbelt markets like Atlanta, Nashville, Austin, Dallas and Phoenix currently have the largest new development pipelines according to CBRE. As a result, overall vacancy rates in these markets is expected to rise and rent growth will continue to decelerate.
Multifamily Supply Gains in Some Markets Are Driving rents Down
This past year saw an all-time high of nearly 11,500 new units added to the Nashville, Tennessee, apartment market, leading to that city’s highest multifamily vacancy rate (11.1%) in 20 years. Supply gains like that in Music City and other Sun Belt metros create the prospect of more rent cuts in the short term.
Markets that saw the deepest year-over-year rent cuts this year, as tracked by RealPage and as of November, were Cape Coral-Fort Myers, Florida (-6%); Austin-Round Rock, Texas (-5.9%); and North Port-Sarasota-Bradenton, Florida (-5.4%). Those are all markets that’ve added more than 20% of their apartment inventory in the past five years.
Freddie Mac Predicts a Soft Landing, In Spite of Record New Supply
“The economy appears to be on track for a soft landing, although it may be bumpy throughout next year,” said Sara Hoffmann, director of multifamily research at Freddie Mac. “In 2024, the multifamily market may see additional strain from high levels of new supply and continued high interest rates but remains a favorable asset class given the state of the for-sale market and long-term demographic trends.”
After demand went negative in the final months of 2022, early 2023 ushered in a demand rebound spurred by resiliency in the labor market. But high levels of new supply of rentals outpaced that demand, constraining rent growth and decreasing occupancy rates, especially in the Sunbelt.
Real Estate is Cyclical, and Cycles are More Pronounced in Hot Markets
2023 rent growth was most muted in regions where rents had increased the most in the two previous years. That includes metropolitan areas across the Mountain West, where rents declined 0.5% from 2023, and the Sun Belt, where rents fell 1.3%. Rent declines were also felt along the West Coast, where rents dropped 0.8%. Vacancy has also increased, putting pressure on debt coverage ratios where value add business plans often required rent growth in the high single digits to succeed.
Meanwhile, in the “Steady Eddy” markets where we like to invest, many regions experienced growth in rents. This is because there is much less supply pressure in the markets we favor. In fact, rents in Metropolitan areas in the Midwest and the Plains rose the most, at 2.7%, followed closely by the Northeast and mid-Atlantic, where rents rose 2.6%. In fact, in certain MSA’s, like Cincinnati, rent growth was even stronger, with Zillow reporting rent growth of 7.9% in Cincinnati as of May of 2023. Cincinnati finished out the year with 3.4% rent growth, making it one of the top three markets in the country for rent growth.
Hot Markets Are More Affected by Pressures From New Supply
With more than 1 million units under construction, Freddie Mac expects tepid nationwide average growth throughout 2024 as markets like Phoenix, Nashville, Austin and Dallas struggle to absorb new supply. A softer labor market may also weaken demand in these markets compared to pre-pandemic employment levels.
Freddie Mac suggests that the secondary and tertiary markets we favor in the Midwest may outperform higher-priced, oversupplied parts of major markets in the Sunbelt. This is due to much less pressure from new supply, combined with strong job growth related to onshoring and reshoring.
In fact, in its 2024 outlook, CBRE states that the Midwestern markets we focus on will offer the best opportunities for positive leverage in 2024 (since cap rates are typically at least 25 to 50 basis points higher than elsewhere) while Midwest economic and rent growth will remain relatively robust . These Midwest Multifamily market dynamics are not at all atypical, and we see accelerating employment growth and solid rent growth in the markets where we operate. We’ve been investing in Midwest multifamily real estate since 2006, and we believe that the Midwest continues to offer excellent investment opportunities.