Back in early May on the ALN blog we discussed how rolling 12-month net absorption was obscuring a dramatic decline in apartment demand on a year-to-date basis through April of 2022 thanks to the incredible numbers posted through most of 2021. In the months since, though new supply has continued at a usual pace and rent growth has remained on an absolute tear, apartment demand has remained well below that of a typical year.

Given that this level of demand is so far outside the normal range, and the fact that this metric affects everything else in multifamily, it seemed worthwhile to check back in with the addition of May and June data.

As always, all numbers will refer to conventional properties of at least 50 units.

Monthly Net Absorption

For the month of June, national net absorption totaled a little less than 16,000 units. That marked the seventh consecutive month with net absorption less than 20,000 units. For some context, prior to this current streak, there were only 13 months in the last five years below 20,000 net absorbed unit. Remove 2020 from that data and the total decreases to only seven months. This seven-month streak is also now the longest of the last five years, beating out a six-month period in 2020.

Dramatic declines in monthly net absorption continued to be seen across the four price classes in June, with Class A remaining the most resilient compared to last year thanks to a decline of only 55%. For Class C properties, the net change in leased units for June was essentially zero, and Class D properties suffered a net loss of around 3,200 leased units.

Even more dramatic was the June result for properties that entered the month already stabilized. Last June, stabilized properties absorbed approximately 48,000 net units. Admittedly, this was during a historic run for apartment demand. Going back to 2018 and 2019, since June of 2020 was heavily impacted by the COVID-19 pandemic, June net absorption for stabilized properties equaled about 11,500 and 14,500 units respectively. This year, stabilized properties shed more than 8,000 net leased units in June.

Year-to-Date Net Absorption

With the June data in hand, and knowing June was the seventh consecutive month with net absorption below 20,000 units, the next question is: what is the scale of this year’s shortfall at the midway point compared to recent years? A short answer would be that year-to-date national net absorption basically equaled that from just June alone from 2021.

Through June of 2022, just less than 85,000 net units were absorbed nationally. While this total did marginally surpass that from the same portion of 2020, that is obviously not much of an accomplishment since the pandemic impact on the multifamily industry began around March of that year. Nearly 340,000 net units were absorbed in the first half of last year, with both 2018 and 2019 coming in at just above 200,000 net units.

As was the case in June, Class A properties have weathered the decline in apartment demand better than the other three price classes so far this year. Class A was the only subset of the four not to see net absorption more than 50% lower than at the midway point of 2021 with a 45% decline. Class C properties closed June still in positive territory for the year by a small margin, while Class D properties have lost about 4,000 net leased units.

Continued robust demand within new multifamily properties has helped to boost the Class A figure, while the struggles for properties that entered the year already stabilized has especially impacted the other tiers. Stabilized properties lost almost 40,000 net leased units through the first six months of the year. The only other year of the last five with a negative value at the midway point was 2020, and even then, the loss was only of about 13,000 net leased units.

Takeaways

A cool off in apartment demand that began in the winter months has not yet reversed itself despite the spring and summer periods generally being the strongest for the highly seasonal multifamily industry. With the shortfall in net absorption most acute in the lower price tiers and for stabilized properties rather than lease-up properties, it seems clear that a major factor is price sensitivity. Rent growth has yet to slow, thanks in part to average occupancy remaining elevated after last year, but an active new construction pipeline will begin to pressure occupancy if apartment demand remains so far below the norm from recent years.

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