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  • Writer's pictureJason Tuvia

Demand Hits a First Quarter Record, but New Supply Curbs Vacancy and Rent Progress

Robust Demand Momentum

The multifamily sector experienced substantial demand growth in the first quarter of 2024, with a record-breaking surge in occupied apartments, reaching nearly 104,000 units. This outpaced the average absorption rate over the past three decades, setting a strong pace for the year. Indicators such as declining vacancy rates and increasing lease applications signal ongoing improvement in the market.

Supply Challenges

Despite strong demand, the multifamily sector faces challenges from a significant influx of new supply. Apartment completions reached a new high in the first quarter of 2024, with over 135,000 units finalized nationwide. The rapid pace of construction has led to a modest rise in vacancy rates, even as demand remains robust.

Regional Dynamics

Construction remains concentrated in key markets such as Atlanta, Austin, Dallas-Fort Worth, New York City, Northern New Jersey, and Phoenix. These areas account for a significant portion of both completions and net absorption, indicating a relative alignment between development and demand. However, increased concession usage in construction-heavy markets has tempered rent growth nationally across all apartment classes.

Near-Term Outlook

Looking ahead, the multifamily construction pipeline is smaller but remains substantial for 2025 and 2026. However, a recent slowdown in multifamily permits may signal a more significant, longer-term deceleration in construction activity. The growing affordability gap between homeownership and renting continues to drive demand for multifamily housing despite temporary headwinds from supply-side pressures.

Investment Environment

Elevated debt costs pose challenges for investors, with multifamily transactions declining for a third consecutive quarter. However, strong absorption rates in the first quarter may help boost investor sentiment. Prices and cap rates have recalibrated, with average per-unit sale prices dipping slightly but remaining above historical averages. Higher-end assets are attracting buyers, particularly in primary markets where homeownership barriers are high.

Federal Reserve Policy

The Federal Reserve has maintained the federal funds rate at 5.25 percent since July 2023, with no immediate plans for rate cuts despite ongoing inflation concerns. The tapering of quantitative tightening has begun, with the Fed reducing the pace of asset run-off. Multifamily debt remains available but costly, with lenders offering a range of financing options to borrowers amid the challenging interest rate environment.

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