Multifamily rents continued to increase through the first half of 2023, despite challenges for the sector and continuing economic uncertainty. But job growth has remained robust and new households keep forming, creating apartment demand and ongoing rent growth.
“We anticipate that rents will continue to increase modestly over the course of the year as demand has firmed, albeit at a more moderate rate in line with historic growth levels,” say Yardi Matrix experts in a newly released U.S. Multifamily Outlook.
Through the first five months of 2023, U.S. asking rents rose $17, or 0.9%, with year-over-year growth falling to 2.6%.
“We expect continued deceleration, with rent growth of 2.5% for the full year,” states the outlook. The average U.S. apartment rent reached an all-time high of $1,716 in May.
Challenges for the sector include slowing demand, growing issues with affordability, slower population growth and competition from a large number of new units coming online through 2024.
The capital side of the industry has suffered due to heightened interest rates, which show little sign of decreasing in the near-term. Property values are down 15-20% from their peak and are still declining due to the higher cost of capital.
New deliveries will be high at least through the end of 2024, as the 1 million units under construction come online. New starts are now declining, however, because debt is more expensive and fewer banks are financing construction.
Household formation, which drove the 22% cumulative growth in U.S. asking rents over 2021 and 2022, has slowed but remains positive. Although some pandemic demographic trends are moderating, the desire for more space to balance living, working and family appears to have staying power and should continue to drive demand.
Demand is also boosted by the sharp drop in home sales, which keeps renters in apartments. High mortgage rates also create an affordability hurdle for first-time buyers and middle-income families looking to trade up.
Home mortgage rates rose to 6.5% in March 2023, up 230 basis points from March 2022, increasing monthly mortgage costs by 29% and overall ownership costs by 20%, according to the Harvard Joint Center of Housing Studies.