With national apartment demand 75% lower through July of this year than in the same portion of last year, and lower even than in 2020, many have been puzzled by the persistence of unusually high rent growth. A major factor in that equation has been average occupancy. Even with lackluster net absorption, average occupancy closed July higher than in any July of the last five years thanks to last year’s historic demand.
Household consolidation and the loss of residents to home ownership can pressure multifamily occupancy, but the other major influence is new supply.
Recent New Supply and Net Absorption
A little more than 180,000 new units have been delivered nationwide this year through July. Although that volume of new supply was roughly equal to the average from 2018 through 2020, new supply so far this year has been about 35,000 units less than at the same point in 2021. Taking all of 2021 and the first seven months of 2022 together, national net absorption has outpaced new supply by approximately 200,000 units.
New supply has been lower than last year but within a normal range, but apartment demand has not been. As already mentioned, a 75% shortfall in net absorbed units compared to last year was a stark decline. Arguably more eye-catching was the fact that net absorption was higher in COVID ravaged 2020 through July than it has been this year. The net effect of slightly reduced new supply and substantially reduced demand was an average occupancy decline of 0.7% through July of this year to almost 94%.
The decline in average occupancy this year was larger than the decline through July of 2020, but a 2.4% annual gain in 2021 means that plenty of cushion remains. Average occupancy closed July a full 100 basis points higher than in July of 2019 – the last pre-COVID period of comparison.
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Upcoming New Supply
Construction times continue to grow, the cost of capital is rising, and both labor and supply chain issues remain. Despite these headwinds to new supply, ALN expects in the neighborhood of 315,000 new units to be delivered this year in total based on estimated completion dates for tracked projects. This would be less than last year but more than in any year from 2018 through 2020.
On the demand side, about 200,000 net absorbed units for 2022 appears to be a reasonable estimate at this point. Were those estimates to hold, net absorbed units would account for about 64% of new units – by far the lowest share of the last five years. Even so, the projected shortfall of demand relative to new supply, equal to about 115,000 units, would only push average occupancy down slightly to around 93% to end the year. As a result, year-end national average occupancy would be higher than in 2018, 2019, or 2020 despite the worst annual net absorption in years.
Takeaways
Though rent growth has moderated slightly in recent months, the growth remains well above normal. This growth, even in the face of slumping demand, is bringing a lot of negative attention to the industry from the public and from lawmakers.
The issue at its core is a supply/demand imbalance created in 2021 which has resulted in average occupancy remaining unusually high even without robust demand. Average occupancy will likely need to degrade further for the wind to really come out of the rent growth sails. New supply is expected to be within the typical range established over the last five years, but those new units are unlikely to be enough to push national occupancy back to a pre-pandemic level by the end of the year.
However, looking further ahead to 2023 and beyond, it is clear that the industry will not be able to coast on the benefits of 2021 into perpetuity.
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