As was discussed in the most recent ALN monthly newsletter, it has seemed increasingly unlikely that rent growth momentum could continue its trajectory unaffected by changing market conditions – namely sustained muted demand in recent months.

While May did mark the third consecutive month of improvement for national multifamily net absorption after a winter decline that was dramatic even relative to seasonal norms, apartment demand remained well below previous years for this portion of the calendar. Now, after five straight months without an average occupancy gain at the national level and six straight months with net absorption falling below that of the previous year, the tide may be ebbing for average rent growth as well.

Backdrop for Recent Rent Movement

National average effective rent growth broke out of its typical range for monthly change in April of 2021 with a 1.1% gain during the month. Rent growth continued to gain steam until an August peak in which national average effective rent rose by 1.9%. Though monthly gains would continue to be above 1% for a further two months, the August peak was followed by four successive months of winnowing gains.

In some ways, the cooling of apartment demand and rent growth during the winter months was the first reemergence of typical seasonal effects in multifamily since the onset of the pandemic in Q1 2020. However, one difference that became apparent as the calendar shifted to 2022 was the depth of the trough in apartment demand. From December through February, only about 28,000 net units were absorbed around the country. This was well below the approximately 68,000 net units absorbed in the same period the year prior and was nearly 40% lower than the previous low water mark of the last five years.

Another difference was a bounce in rent growth without the typical associated Spring jump in apartment demand.

Rent Growth in Recent Months

Net absorption, while at least slightly trending upward, has remained far below usual levels through May of this year. In a typical year, March kicks off an apartment demand uptick that carries through August or September with the March through May period accounting for some of the strongest monthly absorption totals of the year. This year, the roughly 50,000 net absorbed units in that three-month period totaled less than just the April net absorption value from 2021 on its own. In both 2018 and 2019, the same three-month period saw absorption of more than 120,000 units across the US. In the last five years, only the pandemic-onset period of 2020 was worse than this year.

In the face of this flagging demand, the upward trajectory in national average effective rent growth that began in January was interrupted slightly in April. Rather than logging a fourth consecutive increase in monthly rent growth, April’s 1% gain represented a small decline compared to the 1.2% gain in March. Though the May gain of 1.1% did not continue the downward move, April and May of 2022 count as the first two months in more than a year that failed to better their counterparts from the previous year in rent growth.

In 2021 an unprecedented explosion in apartment demand, from April through October especially, propelled rent growth out of its generally consistent seasonal pattern. As a result, monthly average effective rent growth in September of 2021 was higher than in March of 2021 – a highly unusual development. There is little reason to expect a similar supercharge to demand this year, and without one, rent growth may fall back into a more traditional seasonal pattern. Were that the case, it would be entirely possible that the largest monthly gains for 2022 are already in the books.

Takeaways

With national average effective rent growth up 16% over the last 12 months, and with a 5% gain in just the first five months of 2022, it may not seem that rent growth has shown any signs of slowing. The same caveat given back in February regarding slumping apartment demand should be mentioned here – one or two data points do not yet make a trend.

Even so, the monthly data show a somewhat different picture. In what is normally the start of the strongest part of the year for rent growth, monthly gains have shifted from a robust upward trajectory in January through March to essentially a sideways move in April and May.

As already mentioned, April and May were also the first two months in more than a year that failed to outperform the previous year. In each year from 2017 through 2020, by the end of May the largest monthly average effective rent gain of the year had already been achieved. 2021 was an outlier across many metrics for many reasons. If 2022 falls back into the preceding pattern, the current streak of monthly appreciation above 1% could be short-lived.

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