With the arrival of March, spring is in the air and the traditionally softer portion of the calendar for the multifamily industry from a seasonal perspective has ended. Seasonal effects play a prominent role in multifamily performance, with the fourth and first quarters usually accounting for the weaker months while the majority of annual net absorption and rent growth tend to be captured in the middle quarters. March, and to a lesser degree October, often represent transition periods as the industry moves between the two major seasonal blocks.

With all of this in mind, now is an opportune time to evaluate how the multifamily industry fared this winter. To do so, only conventional properties of at least 50 units will be included and the included time period will be October through February.

Smaller Markets Struggled on the Occupancy Front

Of the markets that found themselves in the bottom 10% in average occupancy change during this five-month period, Orlando was the only primary market. There, negative net absorption was met with more than 9,000 newly delivered units to send average occupancy downward by 5% to finish February at 89%. Smaller markets tend to stand out in percent change metrics due to their smaller size, but some other clear effects were in play as well.

Significant new supply was the culprit for many of the smaller markets in the bottom 10% for occupancy change since the end of September as well. Areas like Myrtle Beach (12%), Huntsville (8%), Chattanooga (7%), Omaha (6%), and Boise (5%) saw deliveries totaling 5% or more of existing stock in the last five months, with a handful of other secondary and tertiary markets just below that threshold.

On one hand, this dynamic is less concerning than other causes for falling average occupancy at the market level because new supply during the winter months commonly acts as a drag on occupancy, and because lease-ups take time – in most cases occupancy will rebound in the following quarters. On the other hand, many markets around the country, both big and small, have unusually large new construction pipelines at the moment and pressure from deliveries will likely be a common cause of softer performance this year. In that regard, these smaller markets are providing an early glimpse of this approaching challenge.

Another group of these secondary and tertiary markets that particularly struggled on the occupancy front during the winter months are areas in which negative net absorption played a prominent role rather than deliveries that accounted for a significant share of existing stock.

Markets like Albany, GA, Lexington, KY, Wilmington, NC, Augusta-Portland, ME, and Waco-Killeen, TX each lost at least 3.5% in average occupancy during the last five months without notable new supply pressure as defined above. These losses were all due to a net loss of leased units during the period. One market in particular was impacted by both dynamics simultaneously. In Omaha, NE deliveries since September corresponded to 3% of existing stock, above the market average of 1.9% for this period, and a net loss of around 2,200 leased units at the same time led to an average occupancy decline of more than 6%.

Rent Declines in Growth Markets

Whereas significant average occupancy losses were mostly concentrated in smaller markets during the winter months, negative average effective rent growth for new residents impacted primary markets as well. However, the most prominent throughline between markets that struggled on the rent front regardless of market size was areas that can be thought of as growth markets.

High-growth markets have been prominent near the top of the list for rent growth in recent years, and it is not much of a surprise that they seemed to lead the correction during the winter season. This is both because of the recent robust rent growth relative to the average and because moves tend to decline during the winter which particularly affects growth markets.

Boise (-3.9%), Las Vegas (-3.2%), Phoenix (-3.1%), Austin (-3%), and Raleigh-Durham (-2.1%) each closed February in the bottom 10% of markets for average effective rent growth since the end of September. Each of these markets has been both a high-growth, in-migration destination in recent years and a market with rent growth above the national average in the 2020 through 2022 period.

A handful of markets on the West Coast made up another subset that especially struggled on the rent front during the winter. Southeast Washington (-2%), Seattle (-3.1%), and Spokane (-2%) were each in the bottom 10% of markets, as was San Francisco-Oakland (-2.6%). All of these markets can be considered expensive for renters, with San Francisco-Oakland and Seattle near the top of the list for market-level average effective rent and the smaller Washington markets each well above the average for markets of their size. Additionally, these West Coast markets along with the aforementioned Austin and Boise are more directly affected by the tech layoffs that have occurred over the last six months.

Takeaways

With the national cool off in apartment demand that began before summer had even ended last year, there was some cause for concern as to where the bottom might be for the winter period given that in generally the weakest part of the calendar for multifamily performance. With the winter months now in the rearview mirror, the answer appears to be a roughly 130-basis point decline in national average occupancy on the back of a net loss of approximately 45,000 net leased units from October through February.

February marked the seventh consecutive month in which national net absorption was negative, but it was also the third straight month of winnowing losses. With spring on the approach, it is reasonable to expect that negative monthly streak to end in March if the macroeconomic picture largely holds.

As the year progresses, the new construction pipeline is likely to be a major driver of industry performance with smaller markets with active pipelines and growth markets expected to be especially sensitive to the fluctuations of apartment demand.

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