An active new construction pipeline has been delivering units into an environment of low multifamily demand for some time now, and this dynamic is likely to persist through 2023. Looking back over the last six months of complete monthly data – a period from September through February – average occupancy change has performed very similarly across market tiers. On the rent front, some differences have emerged.

Market tiers here refer to four groups of markets derived from categorizing all US multifamily markets according to their level of multifamily stock. The largest, Tier One markets, are those with at least 150,000 units. The smallest, Tier Four, includes markets with less than 25,000 units. In between those groups are Tier Two markets which have between 75,000 and 149,999 units and Tier Three markets which have between 25,000 and 74,999 multifamily units.

While there have been some similarities at the group level, there have also been some notable differences at the individual market level.

Average Occupancy

Average occupancy change has been very consistent across the four market tiers. Each has seen occupancy dip by between 2% and 3% in the last six months. Similarly, all four market tiers closed February with an average occupancy within thirty basis points of 91%. In general, it would be expected that the tiers made up of the smaller markets would have higher average occupancy, but deliveries have ramped up in many of these markets over the last couple of years relative to the norm. This increase in new supply has unfortunately coincided with the lackluster apartment demand that has been a factor in most markets for close to twelve months now.

Partially due to their smaller size which leads to larger swings from a percent change perspective, but also partially due to the recent supply – demand picture, all but four of the twenty markets with the largest average occupancy declines in the last six months were Tier Three or Tier Four markets.

Myrtle Beach (-12%) and Huntsville (-9%) led all markets in the period in average occupancy decline despite managing to avoid negative net absorption. In these areas, tepid demand simply has not kept up with recent new supply. Other markets near the top of the list for average occupancy decline include Omaha (-7%), Boise (-7%), Savannah (-6%), and Chattanooga (-6%). Each of those markets not only had new units delivered in the last six months but simultaneously suffered negative net absorption.

The only two Tier One markets to find themselves among the national leaders in average occupancy loss in recent months were Orlando (-5%) and Charlotte (-4%). For each, net absorption has been positive but barely so, while their construction pipelines have delivered a deluge of new units. Orlando has delivered around 9,700 new units in the last six months while Charlotte has delivered about 7,200 units. New supply will not be materially slowing this year in either market.

Average Effective Rent

Average effective rent performance has been higher variance between the market tiers over the last six months. The Tier One group has been the only market tier to see average effective rent for new residents decline in the period – to the tune of a 0.5% loss. The Tier Two group has managed a 0.8% increase, while Tier Three and Tier Four growth has been approximately 1.5%.

The largest markets account for slightly more than half of the twenty markets with the largest average effective rent declines in the last six months. Even so, Boise (-4%) and Reno (-4%) top the list. Boise was already mentioned in the previous section, but the average occupancy decline in Reno in recent months has been due both to negative net absorption and significant new supply and the decline was more than double the national average.

Primary markets such as Las Vegas (-4%), Austin (-3%), Phoenix (-3%), Seattle (-3%), and San Francisco – Oakland (-3%) were right behind those top two markets. Phoenix was the outlier in certain respects. A flood of more than 9,000 new units in the period was met with net absorption totaling around 4,300 units – the highest net absorption in the country over the last six months. This demand was enough to mitigate the potential average occupancy decline, but rent growth nevertheless took a hit. For the other primary markets listed, recent difficulties include apartment demand.

Aside from the largest markets being more heavily represented among the markets struggling on the rent front recently, another common thread was geographic. Thirteen of the twenty markets with the largest average rent declines were areas in the Mountain West or westward. Some have already been mentioned, but further examples include Spokane (-2%), Southeast Washington (-2%), Sacramento (-2%), Denver – Colorado Springs (-2%), Salt Lake City (-2%), San Bernardino – Riverside (-2%), and Portland (-1%).

Takeaways

Average occupancy change in recent months has been reliably negative and also consistent across market tiers. Poor apartment demand has been a major culprit, but so too has been necessary new supply that happens to have coincided with this period of much lower demand.

Rent change has been decidedly less consistent but through lines have emerged. For one, recent average effective rent declines have been much more of a large market phenomenon than recent occupancy declines. Another is that while not exclusively an issue for Western region markets, a majority of the top twenty market-level declines have been in western areas.

The national new construction pipeline is anticipated to be at least as active with deliveries as in 2022, if not slightly more so. With the softer winter period now behind the multifamily industry, the question becomes to what extent apartment demand can improve in the upcoming two quarters.

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