Multifamily Market Has Hit a Lull

Charlotte, NC, April 29, 2024-“Multifamily work has been very strong for several years for building products/durable goods producers/distributors offsetting the square footage downturn. Starts activities in multifamily are running down consistently 35%+ with last month down 43%. The industry has seen three years of activity roughly double the 35-year average, thus we believe a prolonged downturn could be coming. Market supply has outstripped demand, that along with higher interest rates makes projects less attractive,” reports Truist.

“Results from the Census Bureau have shown a continued substantial contraction in multifamily starts since the first negatives were seen in August. Over the past nine months, these unadjusted actual starts have fallen roughly 35% with March showing the worst decline yet of down 43% year over year. In addition, multifamily results have historically been very volatile, but the consistency of the declines over this period have been notable in themselves.

“The start activity in multifamily surged in 2021 to 2023 and roughly averaged 500,000 units per year. These were the highest years since the early 1980s. With an average start activity of 290,000 starts from 1985 to 2019, the industry would contract roughly 40% to get back to the average. Note some industry participants feel demand may contract below this level for a period of time for the reasons discussed below.

“Supply has grown at nearly a 3% rate during this period while demand, which initially spiked after Covid, has been closer to a 1% gain. The result has been an imbalance that has driven the vacancy rate to around 8% according to CoStar Group. This is the highest seen since the Financial Crisis. Vacancy rates actually rose in the early parts of the 2001 to 2006 housing upturn, but not after the Financial Crisis, thus a correlation assumption on the future is hard to make, in our view. Regardless, with more supply coming on the market we believe it seems like this number could nudge up somewhat.

“Rent increases have not turned negative nationally, but have in specific areas, although increases have flattened out. This is historically the norm as sustained rent decreases are rare. However, apartment values on the open market have fallen notably, with a 16% decline since 2021 and are modestly below 2020 levels. A combination of higher interest rates and flattish rent growth is pushing valuation levels down, which we believe could continue given supply that is to be finished. The market needs to find a new equilibrium.

“Multifamily completion activity has remained positive, although only modestly so in March, as the backlog continues to be worked down. We believe these numbers will go negative towards the end of 2024 and well into 2025.”