State of the U.S. Multifamily Market: 2023 Recap & 2024 Outlook

2023: Brights Spot Emerge from a Tough Year for Multifamily

Flooded by record-high supply that drove down rent growth into low and even negative territory, 2023 was a challenging year for the multifamily industry. In a recent analysis of the latest market data from the fourth quarter, CoStar’s Jay Lybik, national director of multifamily analytics, highlighted his key takeaways from 2023 and offered his predictions for the industry in 2024.

Increase in demand overshadowed by oversupply

Over half a million units — 565,000 total — were delivered in 2023, a high not seen since the mid-1980s. Driving down rent growth, this glut of supply contributed to a national vacancy rate that hit 7.5 percent in December. Year-over-year rent growth averaged 0.9 percent, down 300 basis points (3 percent), and December marked the ninth consecutive quarter in which supply exceeded demand.

Who came out ahead — or lagged behind — in 2023?

Despite the challenging conditions, several winners emerged. These regional markets and asset classes managed to thrive, thanks to stronger fundamentals than the national market:

• Mid-priced properties. Unlike their more expensive cousins, mid-priced apartments — also known as three-star properties — ended the year on a high note, with 62,000 units absorbed and rent growth exceeding the national average.
• Midwest and Northeast. These regions’ limited new supply kept their markets relatively balanced, allowing asking rents to increase by a rate higher than elsewhere in the country, with Louisville, Northern New Jersey, Cincinnati, and Chicago standing out as the top five markets for rent growth.
• Orange County. Bucking the regional trend, this California market led the nation for the highest year-over-year rent growth, the only market outside the Midwest and Northeast to make the top 10.

And despite the woes facing the Sun Belt, the markets of Houston, Miami, and Tucson finished the year in a relatively strong position, seeing rent growth that remained positive even as the rest of the region dropped to zero or negative numbers.

Finishing the year in operational distress, luxury apartments and formerly hot Sun Belt markets, such as Atlanta, Charlotte, Jacksonville, Orlando, and Austin, all posted negative rent growth, hit hard by oversupply. Four- and five-star properties saw vacancy rates rise to above 10 percent.

What is the prospect for 2024?

But despite these headwinds, Lybik extracted several signs of hope from the market data:

• Demand is steadily creeping upwards. With a 124-percent increase in absorption, this rebound has been “impressive,” Lybik said, but it continues to be swamped by the excess of supply.
• The vacancy rate may be stabilizing. Even though 2023 ended with vacancy over 100 basis points (1 percent) higher than the previous year, the rate of increase has been slowing, indicating that the spike in vacancy may be coming under control.
• Rent growth is expected to return. All major markets are expected to return to positive rent growth, although this process may take until late in the year for the markets currently under the greatest pressure from new construction.
• Deliveries will slow somewhat. After a 40-year high of completions, construction starts will slow. Deliveries for 2024 are projected to drop by 25 percent but will remain elevated compared to their pre-pandemic benchmark.

“Conditions in 2024 have the potential to stabilize,” Lybik said, “especially if middle-market demand continues to strengthen, and balance in supply and demand at the top end of the market can be achieved in the Sun Belt.”

Lybik highlighted five Southern markets — Miami, Charlotte, Austin, Nashville, Raleigh — at the greatest risk of oversupply in 2024. These are among the 40 percent of markets not expected to regain their five-year pre-pandemic average rent growth, indicating the gradual pace of recovery.

Looking for more multifamily insights? CoStar is the industry-leading source for information, analytics, and news about all areas of commercial real estate. Whether you’re an owner, investor, or apartment operator, you’ll find in-depth analysis from Jay Lybik and other experts to help you stay on top of the latest trends in the market. Learn more about CoStar.