For the first time since July of last year, national monthly net absorption for March was in positive territory. The net gain of nearly 13,000 leased units exceeded March of 2022 by around 1,000 units and provided a positive data point for the industry as the spring and summer months approach. All numbers will refer to conventional properties of at least 50 units.

Quarterly Net Absorption

After a net loss of leased units in both the third and fourth quarters of 2022 at the national level, a return to positive territory in the opening quarter of 2023 was an encouraging sign. After January and February both failed to avoid losses, March’s almost 13,000 net gained leased units was enough to bring the first quarter to a gain of just less than 11,000 net units. Quarterly multifamily demand to open the year was well below a typical first quarter from recent years, but nevertheless represented a shift in trajectory from the steady decline of last year.

The challenges continue to persist most especially in the lower price tiers. National Class A and Class B apartment demand was approximately 50% lower than in Q1 2022, but the workforce housing segments each suffered a net loss in rented units in the opening quarter.

For Class C properties, a net loss of about 1,300 leased units followed last year’s gain of almost 4,000 units in the same portion of the calendar. For Class D, last year’s net loss of around 1,000 leased units was followed up this year with a loss of nearly 12,000 net units. Class D was the only price class to experience a decline in average effective rent for new leases in the quarter, but the substantial rent increase of the last few years continue to weigh heavy.

Market Notes

New York and Philadelphia led the way in first quarter net absorption with around 3,000 and 2,800 net absorbed units, respectively. The San Francisco – Oakland region managed to finish the quarter with the fourth-highest absorption with right around 2,500 net units. The quarter represented a positive indication for those markets given their lackluster demand last year.

The other markets to crack the top five for first quarter demand included two of the strong in-migration areas of recent years – Phoenix and Tampa. In Phoenix, first quarter net absorption finished at around 2,700 units and Tampa closed the period just under 2,500 net absorbed units. Half of markets suffered a net loss of leased units in the first three months of 2023. Hardest hit was Los Angeles – Orange County, where more than 3,600 net leased units were vacated.

Other areas that particularly struggled in the period included Detroit, Indianapolis, Sacramento, and Dallas – Fort Worth. Each experienced a net loss of between 1,000 and 1,400 leased units in the period. Of those markets, Dallas – Fort Worth is perhaps the most notable given that it is a market accustomed to being near the very top of the list for market-level apartment demand and is perennially one of the most active markets in the country for new supply.

Takeaways

The first quarter brought with it some cause for a measure of optimism for the multifamily industry as spring progresses and the summer months approach. March marked the first month since last summer that monthly net absorption was positive. As a result, the first quarter managed to end the streak of negative quarterly net absorption at two quarters. However, not all was roses.

First quarter demand was much more tepid than in recent opening quarters. In a year in which new deliveries are expected to be very high, apartment demand will need to continue to improve as the year progresses to prevent occupancy from softening further than it already has. Additionally, while national net absorption for the first three months for 2023 was positive, half of U.S. markets did not meet that threshold.

As was the case last year, this year is shaping up to be one in which market-level performance is higher variance than in 2021 when myriad factors combined into a tide that lifted all boats.