MULTIFAMILY INVESTMENT GUIDE
Multifamily INVESTMENT GUIDE
In Q2 2023, the multifamily housing market continued the trend of supply exceeding demand for the seventh consecutive quarter. Although there was a rebound in net absorption with 42,000 units absorbed, the delivery of 109,000 new units led to a slowdown in national rent growth from 3.8 percent to 1.7 percent. Rent growth varied across regions, with the Midwest and Northeast faring better than Sunbelt markets like Las Vegas and Phoenix, which experienced significant rent declines. The national vacancy rate increased to 6.7 percent from a record low of 4.7 percent in 2021, and is projected to reach the mid-seven percent range by the end of the year. Factors such as elevated inflation, previous rent increases, and economic uncertainty have contributed to a tempering of multifamily housing demand.
Expenses are outpacing revenues for multifamily affordable housing properties, a trend set to accelerate, according to S&P Global Ratings. While property owners have seen net income per unit increase due to high rent growth in previous years, growth has slowed considerably in 2023, with the median U.S. asking rent declining. According to GlobeSt., rising expenses, particularly property insurance premiums, repairs and maintenance costs, and utilities, are contributing to the financial strain. Insurers are increasing premiums, especially in California, and coastal markets are experiencing significant insurance expense hikes, impacting transactions. Florida, in particular, faces soaring insurance costs due to natural disasters, new developers, high-interest rates, and construction-related lawsuits. These escalating expenses may affect site selection, construction timelines, and deal viability, necessitating a shift towards expense management to maintain reasonable rents and provide a valuable living experience for residents.
SECTOR OVERVIEW
KEY
Source: CoStar Group 12 Mo Delivered Units 12 Mo Absorption Units Vacancy Rate 12 Mo Rent Growth 478,044 158,782 6.7% 1.7%
INDICATORS Source: CoStar Group CURRENT QUARTER UNITS 4 & 5 Star 5,514,180 3 Star 7,480,268 1 & 2 Star 5,972,729 National 18,967,177 ANNUAL TRENDS 12 MONTH Vacancy Change (YOY) 1.5% Demolished Units 3,615 Effective Rent Growth (YOY) 1.5% Sales Volume $153B
NATIONAL RENT GROWTH YOY
CoStar Group
Source:
Atlanta -1.1% Nashville 0.3% New York 2.4% Denver 1.5% Austin -2.3% San Diego 3.6% Tampa 0.5% Los Angeles 1.2% Fort Lauderdale 2.0% Jacksonville -0.5% DallasFort Worth 0.6% Chicago 3.9% Minneapolis 1.8% Cleveland 3.2% Orange County 0.6% Phoenix -2.6% } Atlanta, GA: -1.1% } Austin, TX: -2.3% } Chicago, IL: 3.9% } Cleveland, OH: 3.2% } Dallas-Fort Worth, TX: 0.6% } Denver, CO: 1.5% } Los Angeles, CA: 1.2% } Fort Lauderdale, FL: 2.0% } Jacksonville, FL: -0.5% } Minneapolis, MN: 1.8% } Nashville, TN: 0.3% } New York, NY: 2.4% } Orange County, CA: 0.6% } Phoenix, AZ: -2.6% } San Diego, CA: 3.6% } Tampa, FL: 0.5%
Net Absorption, Net Deliveries & Vacancy Over the Years
Source: CoStar Group ■ Net Absorption ■ Net Deliveries ■ Vacancy 2022 2018 2017 2023 2019 2024 2020 2026 2027 2025 2021 300K 250K 350K 200K 150K 100K 50K 0 -50K 7.5% 7.0% 8.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% Forecast Absorption & Deliveries in Millions SF Vacancy
national vacancy trends
CoStar Group BUILDING TYPE VACANCY RATE CLASS A 9.0% CLASS B 6.4% CLASS C 5.1% NATIONAL 6.7% VACANCY RATE Source: CoStar Group ■ United States Class B ■ United States Class A ■ United States 2022 2018 2017 2023 2019 2024 2020 2026 2027 2025 2021 7% 11% 10% 6% 9% 8% 5% 4% 3% Forecast
Source:
national markets YOY rent & vacancy changes
Source: CoStar Group CITIES VACANCY RATE 12-MONTH RENT GROWTH Atlanta 10.0% -1.10% Austin 10.0% -2.30% Chicago 5.50% 3.90% Cleveland 6.70% 3.20% Dallas-Fort Worth 8.70% 0.60% Denver 7.70% 1.50% Los Angeles 4.60% 1.20% Fort Lauderdale 5.50% 2.00% Jacksonville 11.0% -0.50% Minneapolis 7.10% 1.80% Nashville 10.10% 0.30% New York, N.Y. 2.40% 2.40% Orange County 4.40% 0.60% Phoenix 9.30% -2.60% San Diego 3.50% 3.60% Tampa 7.60% 0.50% San Jose 5.30% 0.40% Miami 5.30% 2.0% Charlotte 9.80% 1.00% Orlando 8.70% 0.30% Indianapolis 8.20% 4.80% Cincinnatti 5.50% 5.30% Kansas City 7.60% 4.50% Boston 5.0% 3.70% Louisville 7.10% 3.70%
RENT AND VACANCY RATE Source: CoStar Group Rent Growth 0% 2% 4% 6% 8% 10% 12% Vacancy Rate 4% 3% 6% 5% 2% 1% -1% 0% -2% -3% Cincinnatti Indianapolis Kansas City Chicago Louisville Cleveland New York, N.Y. Los Angeles Orange County San Jose Miami Phoenix Austin Tampa Orlando Dallas-Fort Worth Atlanta Jacksonville Charlotte Denver Minneapolis Fort Lauderdale Nashville Boston San Diego
YOY
rent rankings
MULTIFAMILY APPROXIMATE RENT PER UNIT Source: CoStar Group
CoStar Group $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Atlanta Austin Chicago Cleveland Dallas-Fort Worth Denver Los Angeles Fort Lauderdale Jacksonville Minneapolis Nashville New York, N.Y. Orange County Phoenix San Diego Tampa San Jose Miami Charlotte Orlando Indianapolis Cincinnati Kansas City Boston Louisville
Source:
NATIONAL FUNDAMENTALS
Unrelenting inflation and rate hikes have impacted multifamily terminal cap rates. However, despite a decrease in transaction activity, multifamily properties remain the most highly sought-after investment type in 2023. According to Costar Group, about 25 percent of deals over $5 million sold in Q4 2022 generated sub-four percent cap rates, while the bulk of transactions led to going-in yields in the four to five percent range. By the end of Q1 2023, 1.04 million multifamily units were actively being constructed. According to current estimates, the number of new units expected to be completed in 2023 is projected to reach a record high of 483,000 units, which is the highest in 40 years. New data from Yardi Matrix reveals that the average asking rent gained $7 in June, to $1,726, which is equivalent to a 1.8% year-over-year rent growth.
DELIVERIES & DEMOLITIONS Source: CoStar Group $100,000 $160,000 $180,000 $80,000 $140,000 $120,000 $60,000 $40,000 $0 $20,000 $-20,0000 Forecast ■ Deliveries ■ Demolished ■ Net Deliveries MARKET CAP RATE Source: CoStar Group 2022 2018 2017 2019 2020 2021 2026 2023 2024 2025 5.4% 6.0% 6.2% 5.2% 5.8% 5.6% 5.0% 4.8% 4.4% 4.6% 4.2% Forecast ■ United States Class B ■ United States Class A ■ United States SALES VOLUME & MARKET SALE PRICE PER UNIT Source: CoStar Group $200K $260K $280K $180K $240K $220K $160K $40 $100 $120 $80 $60 $20 $0 ■ United States Class B ■ United States Class A ■ United States Sales Volume in Billions Market Sale Price/Unit Forecast 2022 2018 2017 2019 2020 2021 2026 2023 2024 2025 2022 2018 2017 2019 2020 2021 2026 2023 2024 2025
Top Performing Multifamily Markets
In 2022, New York, Atlanta, Los Angeles, Phoenix, and Washington, D.C. were identified as the most active multifamily investment markets. These cities were the top-performing markets because they were also in the top ten regarding combined net deliveries of new properties during 2021 and 2022. Their ability to handle new supply and push forward in an environment of rising rates and inflation is also a significant contributor to their success. As a result, in 2023, investors interested in investing in newly constructed properties had plentiful opportunities in these markets.
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