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Category: Multifamily Tags: Market Outlook

Multifamily Market Trends and Concerns

The multifamily real estate market has been experiencing a period of ease and favorable conditions over the last ten years. However, it appears that this favorable climate may no longer be the case. The market has undergone significant transformations in recent years, characterized by factors such as an upswing in the supply of multifamily units, COVID-19-related shocks, and an exceptional recovery followed by rapid rent declines. Because of this, securing financing for deals has become more difficult. Skilled and well-prepared investors will likely continue to succeed in this market, while ill-prepared investors may face difficulties. As we enter mid-2023, the market is witnessing the emergence of supply/demand imbalance in both urban and suburban submarkets, with a notable concern about oversupply in certain areas.


Impact of Over Supply on Multifamily

Multifamily real estate has been marked by a continued trend of supply outpacing demand, leading to a challenging landscape for investors and property owners. This can be attributed to developers rushing to take advantage of the growing opportunities presented by the multifamily market, with many over-estimating the long-term demand for apartments.


The influx of too many units can have severe implications for investors, landlords, and tenants. With an over-saturated market, apartment rentals may fall short of initial estimates, which can result in lower cap rates, increased operating expenses, and decreased profits.


Furthermore, competition for tenants can increase, resulting in decreased rental prices and concessions—making it difficult for landlords to find and retain tenants. Finally, an oversaturated multifamily market can exacerbate existing economic and social issues, such as the displacement of existing tenants or an increase in the demand for affordable housing leading to overcrowding and poor living conditions.


According to Costar Group, the market is facing significant pressure on rent growth and occupancy rates, with the sixth consecutive quarter of supply surpassing absorption.


Multifamily Demand

According to construction data provided by Dodge & Data Analytics, the national supply pipeline currently boasts over 1 million multifamily rental units, representing an impressive 75% increase since 2019.


As new units are delivered throughout the country, coupled with a softening demand that began in late 2022, the potential for oversupply is becoming a cause for concern in several regions.


As stated by Fannie Mae, urban submarkets have experienced higher inventory additions, with an average increase of 8.9 percent. On the other hand, despite witnessing the highest rent growth, suburban submarkets have seen fewer multifamily units added on average, with an average increase of 5.3 percent since 2020. This discrepancy implies that while suburban areas are experiencing robust rent growth, they have managed to maintain a relatively balanced supply-demand dynamic.


Rising vacancy rates in submarkets nationwide reflect the impact of slowing demand for multifamily units and a likely near-term excess of supply. Costar Group data has shown that absorption in Q1 2023 was only 42,000 units, way below the five-year pre-pandemic average of 82,000. Simultaneously, 109,000 new units were supplied. Because of the supply-demand imbalance, the national vacancy rate has risen 200 basis points from an all-time low of 4.7 percent in Q3 2021 to 6.8 percent in 2023.


In the first year of the pandemic, demand for multifamily notably increased, which caused developers to push plans for additional construction. In 2023, several of those projects are expected to be completed. As a result, the national expectation is for 519,000 additional units to be delivered in 2023, the largest new supply to enter the market since the mid-1980s, according to Costar Group.


In 2023, it is anticipated that 20 markets will experience a record number of new multifamily deliveries, with 12 of these markets located in the Sunbelt region. However, this surge in new deliveries coincides with a period of slow demand, which raises concerns about the potential negative impact on market conditions in these areas by the end of the year.


Multifamily Rent Growth Nationwide

In March 2023, the average asking rent in the U.S. increased by $3 to $1,706, according to YardiMatrix.


Some markets have struggled to sustain rent increases due to surplus supply, while others are witnessing a decline in demand. However, certain submarkets have defied the odds. According to Fannie Mae, locations such as Greensboro, Riverside, Jacksonville, and Miami have experienced rent growth of over 35 percent despite having less than 5.5 percent inventory growth.


Most metros with the least rent growth since 2020 have been urban submarkets.


The Major Outlier: San Francisco

Among the metros, San Francisco stands out as a unique case. The metro saw the most significant rent reduction in the country during 2020 and has been the slowest market to recover since then. San Francisco and San Jose are the only two major metro areas where the median rent is less than at the start of COVID-19.


Sunbelt Markets

Sunbelt markets have experienced a substantial decline in rental rates during the last 12 months. Locations like Las Vegas and Phoenix, which previously had rent growth rates of 19 percent and 17 percent, respectively, have now seen their rental rates plummet to -1.9 percent each over the last 12 months, according to Costar Group. This downward trend in multifamily rental rates is expected to persist throughout 2023 as the economy faces the looming risk of a recession and several markets grapple with oversupply conditions.


Additional Trends Affecting Multifamily

Evolving Tenant Preferences

Tenant preferences in the multifamily market are evolving, and property owners need to adapt to these changing demands. Today’s tenants seek more than just a place to live; they are looking for a comprehensive living experience. Amenities such as fitness centers, co-working spaces, pet-friendly facilities, and smart home technology are becoming increasingly important. Property owners who can offer these amenities and cater to the evolving needs of tenants are likely to attract and retain high-quality residents.


Technology and Innovation

Technology is still shaping the multifamily market, and its impact cannot be underestimated. Technology has altered how properties are marketed, maintained, and experienced, from online property search platforms to smart home automation systems. Property owners can gain a competitive advantage in attracting tenants and maximizing operational efficiency by embracing technology and using creative solutions.


Sustainability and Green Initiatives

Sustainability has been a prominent concern throughout businesses, including the multifamily market. Tenants are actively seeking eco-friendly living options as they become more aware of the environmental consequences. Property owners might incorporate energy-efficient appliances, green building materials, and recycling initiatives to address these expectations. This not only benefits the environment, but it may also attract environmentally conscious tenants.


Market Segmentation

The multifamily industry is not one-size-fits-all. Understanding and appealing to specific target audiences relies heavily on market segmentation. Property owners must identify their niche and adjust their products accordingly, whether they are catering to luxury renters, student housing, or inexpensive housing. Property owners can better position themselves in the market by understanding the specific demands and preferences of different sectors.


Office to Multifamily Conversion

The conversion of office buildings into residential apartments has gained attention in the real estate industry since the onset of COVID-19. However, according to Costar Group, the forecast predicts that only around 10,000 new office to multifamily units will be completed in 2023. Although this number may increase in the coming years as more proposed projects move forward, the overall impact on the total number of new units delivered will still be relatively small compared to other development projects.


Multifamily Investing

Multifamily investing provides investors with several appealing benefits. For starters, multifamily residences provide a constant and predictable stream of revenue. The rental revenue provided by multifamily properties is more stable than that of single-family houses or commercial properties since multiple tenants occupy different units. Even during economic downturns, people require housing, making multifamily homes a resilient investment.


Second, multifamily real estate provides economies of scale. Managing several units under one roof enables more effective property management and lower unit costs. Maintenance and other operational expenditures might be split across numerous tenants, saving money. Furthermore, multifamily properties often have greater occupancy rates, reducing the vacancy risk and ensuring a consistent stream of rental income.


Investing in multifamily properties also provides diversification. This diversity spreads risk and mitigates the impact of prospective vacancies or rental defaults. It also allows investors to hedge against market swings by investing in diverse geographic areas, property sizes, or demographics.



The increase in the supply of multifamily units, combined with softening demand and the potential for oversupply in specific regions, has led to diminishing rent growth rates and vacancy patterns. While some metros have experienced remarkable rent increases, others are struggling to regain their pre-pandemic momentum. These dynamics highlight the importance of understanding the specific submarket conditions when analyzing the multifamily housing sector.


It is essential for apartment owners and developers to conduct thorough market research before investing and developing in order to accurately assess the potential of multifamily investment. In addition, appointing a property management company to oversee the entire process is a prudent approach, as they can provide essential insight into the multifamily market outlook and help predict the future of the investment.


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