One of the interesting dynamics at play in the multifamily industry over the last few years has been markets considerably ramping up their new construction pipelines only to see those deliveries enter the market after the delays of 2020 and 2021 just as apartment demand dissipated in 2022. Net absorption remained low in the first quarter of 2023, which placed further pressure on occupancies in these areas.

This dynamic has been particularly at play in high in-migration regions, and one such example is the Raleigh-Durham market.

As always, numbers will refer to conventional properties of at least fifty units.

New Units and Net Absorption

Over the last twelve months, more than 7,500 new units have been delivered across the Raleigh-Durham market. This level of new supply was nearly 40% higher than in the previous twelve-month period – a period that itself had been the most active for new deliveries of the last five years. Leaders in new units over the last twelve months at the submarket level include the Route 1 – Wake Forest area with about 1,800 new units and the Central Raleigh region with around 1,400 units introduced. In total, twelve of twenty-two ALN submarkets for the Raleigh-Durham market saw some level of new supply over the last year.

Unfortunately, as the number of new units entering the market was climbing, apartment demand was faltering. Net absorption in the last twelve months totaled approximately 2,200 units. This was not only nearly 70% lower than in the previous twelve months but was the lowest demand of the last five annual periods.

A bit of good news was that unlike in many markets around the country, no price class suffered negative net absorption. Even so, there was a more stark shortfall in demand in the workforce housing segments. While all four price classes experienced unusually low net absorption over the last year, the Class A and Class B segments managed to at least surpass the April 2020 through March 2021 period. For Class C and Class D, the last twelve months represented the lowest absorption of the last five years by a considerable margin.

The net effect of much higher new supply and much lower apartment demand at the market level was a 3% decline in average occupancy to close March at 90%. As a result of the decline, average occupancy to end March was lower than when entering the COVID period.

Average Effective Rent and Lease Concessions

Average effective rent for new leases fell by 0.3% over the last twelve months to finish March at about $1,515 per month. A decline is never ideal, but the average remained nearly $350 higher than at the end of March 2021.

Both of the top two price tiers captured a gain in the period, while the two workforce housing segments experienced a decline. The Class C retraction was most acute, to the tune of a 1.4% loss. Class D properties as a group equaled the market average with a decline of 0.3%.

Lease concessions have continued to re-enter the picture in recent months. A 17% increase in availability over the last year led to about 12% of conventional properties offering a discount for new residents at the end of the first quarter. Even after the increase, availability remained slightly lower than the average for this time of year. This situation is unlikely to persist for long with little reason to expect availability not to continue to climb.

Takeaways

The last few years have been something of a roller coaster for the multifamily industry. The onset of the COVID-19 pandemic in 2020 and the associated policy responses and economic disruptions continue to reverberate through the industry and well beyond. For high-growth markets like Raleigh-Durham, the whipsaw nature of apartment demand paired with increasingly active new construction pipelines have begun to take a toll.

With more than 30,000 units currently under construction across the market, and with just over 10,000 units currently in lease-up, new supply pressure will not be going away this year or next. As a result, occupancy and rent performance in for the rest of 2023 will be especially dependent on a resurgence in demand.

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