Yet the multifamily rental market is undergoing a profound transition. This is occurring as the vacancy rate has recently fallen to 4.8%, below its long-term average of 5%. Coupled with the extremely low supply of rental units, this trend creates a powerful demand for rentals. For the last four quarters, net demand has exceeded new construction completions each quarter. The current trend lines would appear to indicate a robust market in the face of an economic storm brewing on the horizon.
Large private equity landlords are boasting turnover rates in the 20s or even low 30s, well below an industry average of 50 percent. This stability is further evidence that millions of renters would rather remain in their existing apartments. Or they don’t move when their leases run out. In major urban markets, roughly 50% of apartment tenants typically relocate at lease expiration. The prevailing situation appears to be reversing this decade-long tide.
With cities such as San Francisco and Seattle continuing to enjoy a resurgence, conditions remain favorable across the multifamily arena. This recovery has been primarily led by the tech companies, notably Amazon, who are forcing their workers back into the office on site. In turn, this new demand has fueled rental markets, making these cities harder to afford for the working class.
Essex Property Trust is the largest landowner on the West Coast. They are very much helping to drive this trend to their advantage. The firm joined forces with Camden Property Trust and Mid-America Apartment Communities. Collectively, they reported record-breaking performances just this first quarter of this year. Analysts have sounded the alarm that these companies would be vulnerable in future economic downturns. Income from their services will likely decrease with an increase in job losses.
The multifamily market just had its best positive net absorption since at least 2000. In fact, it was more than three times the first quarter of pre-pandemic average! According to commercial real estate brokerage CBRE, rents surged by 0.9% in the first quarter from one year earlier. This increase is magnified by increasing demand for rental properties.
Kelli Carhart, a principal and head of CBRE’s multifamily capital markets line, touched on the long-term effects of this recent market surge.
“This boost will lead to increased investment activity in 2025 as improving fundamentals continue to drive investor confidence capital deployment.” – Kelli Carhart
For their part, landlords benefit from reduced turnover and more favorable pricing at renewal. This attractive environment should continue to attract increased investment into the space going forward. As Alex Goldfarb noted, it’s landlords that have the unique advantage in this new landscape.
“The consequence is landlords are getting better pricing from renewals, as people don’t want to leave.” – Alex Goldfarb