Despite continued high average occupancy and robust effective rent growth, the multifamily industry finds itself in a very different position than it did this time a year ago.

Since April of 2021, national average effective rent has risen by 16%. Unique boons to 2021 performance that added cash to the bank accounts of residents such as multiple stimulus payments in 2020 and 2021, changes to the Child Tax Credit, increased unemployment benefits with wider reach, and lower inflation have all shifted into the rearview mirror.

On a rolling 12-month basis, apartment demand looks great. More than 515,000 net absorbed units over the most recent 12 months is well beyond previous annual periods. And yet that number is mostly still just capturing the incredible demand from the second and third quarters of last year. The picture is very different when evaluating monthly or year-to-date data.

April Net Absorbed Units

Only around 16,000 net units were absorbed in April, a 75% decline from April 2021. If not for April of 2020, the first month materially affected by the COVID-19 pandemic, this year’s result would be the worst April result of the last five years by a wide margin. In fact, apartment demand for April was less than half that of any year of the last five with the exception of April 2020.

The cratering of demand occurred across all four price classes as well, but was increasingly pronounced in descending order from Class A to Class D. A 91% drop off for the Class D segment compared to April 2021 resulted in only about 800 net absorbed units nationwide in April.  Class C saw a 90% decline compared to last year, while Class B fell ‘only’ 78%. Class A, while resilient relative to the other price classes, still suffered a decrease of 50% in net absorbed units. While it is true that demand was already well above normal in April of last year, making these percent change values seem extreme, it is also true that aside from April of 2020, this year’s results were the worst for all four price classes going back to 2017.

Of course, net absorbed units is not the only metric by which to evaluate apartment demand. Another metric is what ALN generally refers to as absorption percentage – net absorbed units as a percentage of unoccupied units available to lease. Here too, a dramatic shortfall was observed in April. National net absorbed units accounted for approximately 2% of available unoccupied units during the month. Last year, that same metric for April was just over 6%. In each of the pre-pandemic years of 2018 and 2019, April absorption represented between 4-4.5% of available units.

Year-to-Date Net Absorbed Units

Significantly lower apartment demand was not a phenomenon unique to April. As was discussed in last month’s ALN newsletter, first quarter absorption was down 65% from Q1 2021 and about 40% of markets around the country suffered a net loss of leased units in the opening quarter of the year. Adding April to the mix brings the year-to-date shortfall in net absorption to 68% compared to the first four months of last year. Around 50,000 net units absorbed in the period this year was lower even than in 2020, and 2022 joined 2020 as the second year in the last five to have failed to reach at least 100,000 net absorbed units by the end of April.

The price class perspective provides mostly the same view from a year-to-date perspective. Net absorption for Class C and Class D was 95% and 97% lower than the same portion of last year respectively. For some perspective, about 1,000 net Class C units have been absorbed through April of this year after averaging more than 28,000 net units for that four-month span from 2017 through 2019.

An indication that a downturn in demand that began in the Class C and Class D space is increasingly becoming more of a factor in the top two price classes is apparent when considering the year-to-date numbers compared to the monthly results for April. While net absorption this April was lower than last April by 50% for Class A and 78% for Class B, the year-to-date shortfall through April was only 39% and 67% respectively. In other words, momentum for falling demand is picking up for these properties.

Takeaways

National average occupancy closed April higher than any April of the last five years. Monthly rent growth was once again above 1%. Lease concession availability ended the month well below that of any April in the last five years. Apartment demand over the last 12 months has been higher than in any recent 12-month period and was more than 40% higher than in the previous 12 months.

And yet, while all of these observations are true, they don’t tell the whole story. For now, rent growth momentum has continued, but the downward trend in apartment demand is also picking up strength. Something has to give. With affordability concerns exacerbated by the rent growth of the last year, less money flowing into the bank accounts of residents as COVID response measures fade, and inflation continuing to pick-up steam – there seems to be little reason to expect the demand issue to shift course substantially in the near term. The post-COVID recovery party may soon come screeching to a halt.

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