Lackluster Renter Demand Cools Off Blistering Apartment Rent Growth
Over the past 90 days, we have seen a significant change in tone for multifamily rent growth. While the record rent growth seen in 2021 was unlikely ever to be repeated, so far this year demand for apartments has performed below somewhat modest expectations.
Of particular note has been the plunge in absorption, or the net change in leased and vacated units. While still positive, net absorption totaled only 67,000 units nationwide in the second quarter, the third consecutive quarter in which absorption has remained in the 60,000-unit range, well below the record totals posted last year but also below the average compared to pre-pandemic figures. This is noteworthy as the second quarter historically records the highest absorption totals for the year.
The tempering of renter demand can be directly tied to rising inflation cutting into the budgets of potential renter households. Concerns over a possible recession are also likely contributing to the slowdown in potential household formations.
Three quarters in a row of subdued absorption resulted in apartment rents pulling back faster than projected during the second quarter. The national year-over-year average asking rent growth declined from a record 11.4% in the first quarter of 2022 to 9.2% at the end of June.
The Sun Belt continued to dominate the top 10 markets for rent growth in the second quarter this year, with Florida markets holding the top four spots. Yet apartment rents decelerated significantly over the past quarter in Palm Beach and Tampa. Year-over-year rent growth declined 9.7 percentage points since the first quarter in Palm Beach and 9 percentage points in Tampa.
Las Vegas also saw a dramatic slowing of rent growth over the past quarter where the growth rate for average asking rents dropped from 20.6% in the first quarter to 11.7% at the end of June. Few markets were able to dodge the tempering of rents over the past quarter, but San Jose, California, bucked the trend and saw rent growth increase 80 basis points to 11.2%.
Multifamily absorption slipping into neutral so far this year couldn’t have happened at a worse time for multifamily developers as a total of 458,000 apartment units are expected to be completed this year, the highest number since the 1980s. The downside risk of multifamily oversupply nationally, nonetheless, remains limited due to the lack of supply additions from 2009 to 2016. There are, however, a handful of markets where construction pipelines have begun to outpace near-term demand and are at risk of oversupply.
Atlanta, Austin, Las Vegas, Phoenix and Tampa top that list. For example, Phoenix’s 2022 demand forecast expects 8,000 units to be rented, but supply deliveries are projected to be double that amount. Year to date, Phoenix has experienced only 1,700 units of absorption, so it has a lot of ground to make up in the second half of the year to reach its demand estimate, while deliveries seem right on track as 8,000 units have been completed so far this year. The impact to Phoenix’s rent growth has already been felt, with the average rate of increase declining from 18.5% to 10.1% during the second quarter.
While the 2022 national and major market rent growth outlook has been lowered since last quarter, both remain well above historical averages. The full-year national forecast calls for apartment rents to increase by an average of 6.6%, which would be the second highest on record behind last year’s total.
For major markets, only three, Las Vegas, Phoenix and Sacramento, are projected to end the year below their pre-pandemic five-year average. In total, even with a couple of downside risks, the national vacancy rate for apartments should remain below 5.5% at the end of 2022 and propel most markets to finish the year on a solid note.