Key Takeaways:
U.S. multifamily vacancies decreased by 10 basis points (bps) in Q2, with absorption exceeding 138,000 units. The resilient labor market, bolstered by the addition of over 500,000 jobs in the quarter, supported new household formation and positive real wage growth. Year-to-date absorption is close to surpassing last year's total demand and is up 75% compared to the first half of 2023.
Vacancy declines are coming at the expense of rent growth. Despite a slight recovery in fundamentals, vacancies remain higher than they were during the GFC. Multifamily rent growth is up 1.7% over the last year, about half the historical average.
A tough capital markets environment has led to a significant drop in construction starts, with only 103,000 units initiated this year—down nearly 60% from the first two quarters of 2023. If the economy steers clear of recession, as outlined in Cushman & Wakefield’s Market Report, conditions should remain favorable for a recovery in fundamentals over the next two years.
Economic Drivers:
Steady job growth, strong immigration, and robust household formation are driving high demand for apartment units in 2024.
The 30-year fixed mortgage rate has been fluctuating between 6.5% and 7% for most of the year, a significant rise from the 3% to 4% range before the Fed's rate hikes. This increase, combined with rising single-family home prices, has made homeownership unaffordable for many, leading to a surge in demand for multifamily housing. The 30-year fixed mortgage rate is anticipated to stay above 6% through the end of 2025. Healthy household formation is projected to average over one million new households annually over the next two years. This, along with a shortage of affordable single-family homes, is expected to keep demand for apartments strong throughout the forecast period.
Outlook:
The multifamily vacancy rate has increased from a low of 5.1% in mid-2021 to 8.7% as of Q1 2024. Cushman & Wakefield's baseline forecast anticipates a peak of 8.9% at the end of this year, followed by a decrease to 8.3% in 2025 and 7.3% in 2026.
The construction pipeline is diminishing due to market conditions and challenging financing. Multifamily permits as of Q1 2024 are down 38% from their peak, which will help tighten vacancy rates after the current supply wave. Forecasted deliveries are set at 400,000 units for this year, but will roughly halve in 2025. It may take several quarters to lease these new units, but demand is strong, as shown by the absorption of 85,900 units in Q1, the highest in two-and-a-half years and the second highest first-quarter total on record. Demand is projected to average 292,000 units annually in 2024-2025, slightly above the 2017-2019 average.
Property owners are prioritizing occupancy over rental increases, resulting in decelerating rent growth. National rent growth is expected to bottom at 1.2% in 2024, then reaccelerate to 2.7% in 2025 and 5.1% in 2026.
