Multifamily Absorption Stumbled in June

As has been addressed on the ALN blog repeatedly this year, among many uncertainties in the current environment, one certainty is that 2023 is going to be a very active year for new multifamily deliveries. With apartment demand typically cooling in the fourth quarter – and with the upcoming return of student loan payments – summer net absorption will be a key determinant of 2023 industry performance as the construction pipeline continues apace in the back half of the year.

All numbers will refer to conventional properties of at least fifty units.

Spring Improvement Faltered

One data point does not make a trend, so a backward step in June does not necessarily mean that the demand bounce from the spring will not translate into the summer. However, in a usual year, net absorption does not slow after the spring until August or September. This year, steady improvement through the spring months brought monthly net absorption to a little more than 27,000 units nationally in May. While far from the heights of 2021, the May total was the highest of any month since January of 2022.

That fact, combined with the steady improvement over a three-month period provided some cause for optimism moving into the summer. Unfortunately, national net absorption in June totaled only approximately 9,000 units. The June result was the lowest since February of this year and the lowest of any June in more than five years – including 2020. The new construction pipeline delivered more than 55,000 new units during the month, the highest of any month in the last few years, and national average occupancy fell by thirty basis points as a result.

The Class A segment was the only price class that managed to maintain demand from May to June. About 9,700 net absorbed units in June was slightly higher than the May figure. The Class B and Class C subsets each saw significant declines in absorption in June, but a net loss of around 4,100 leased units for Class D represented the low water mark. Class D rent growth for new leases kept pace with the other price tiers in the first quarter this year, and the slowdown to no growth in the second quarter was not enough to avoid the net loss of leased units.

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Takeaways

The summer is off to an ignominious start for multifamily demand. After some encouraging improvement through the spring, the upward trend for net absorption has been interrupted for at least one month. Without a rebound in demand, the outlook for 2023 will darken further due to new supply pressure. 250,000 new units were delivered in the first half of the year, and at least many are expected to be introduced in the back half of the year.

National average occupancy closed June at just barely above 90%, and that 90% threshold could be crossed as soon as July or August. New supply has been, and will be, particularly focused in the Sunbelt this year. Those markets saw monthly net absorption drop by about 50% from May to June.

Upcoming headwinds to multifamily demand include the continued affordability crunch from the rent growth of 2021 and 2022 combined with the inflation of the last few years in the broader economy, the potential for labor market softening as some early indicators of economic challenges begin to emerge, the imminent return of student loan payments, and the seasonal trends that typically bring a slowdown in absorption in the final quarter or so of the year.

With myriad challenges ahead, the industry will need a bounceback in net absorption to materialize for the remainder of the summer to mitigate the downward pressure on occupancy and rent growth in the back half of the year.

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