State of the U.S. Multifamily Market: Mid-Year 2023

Rising Interest Rates, Slowing Rent Growth: The Mid-Year Outlook for the Multifamily Market

Will the U.S. fall into recession this year? How low will rent growth go? In a recent webinar, CoStar experts offered an analysis of the economic and market trends shaping the multifamily market in mid-2023. Christine Cooper, CoStar’s managing director and chief U.S. economist, examined the current state of the economy and prospects for a recession, while Jay Lybik, national director of multifamily analytics, dove into oversupply, vacancy, and rent growth within the apartment sector.

Is a recession on the horizon?

Looming for months, a recession has so far failed to materialize, even as the Federal Reserve has continued to raise interest rates in its efforts to tamp down inflation. What has held off the expected recession so far? Cooper pointed to three key factors.

First, inflation remains high. Although the consumer price index is down from its 2021 peak of 9.1 percent, the core consumer price index — which excludes food and energy prices — remains high at 4.9 percent, or more than twice the target set by the Federal Reserve, Cooper said.

Second, many parts of the economy have resisted the effects of elevated interest rates. Services, including travel and entertainment, have been growing, while several large sectors, such as education, health care, and government, are relatively immune to interest rate hikes. In the current economy, it’s primarily the manufacturing sector, which requires borrowing to maintain its equipment needs, and the housing market that have shown the most sensitivity to rising rates. Both sectors have been in contraction all year.

And, finally and most notably, the labor market remains strong, with new jobs added each month and the three-month average above the 200,000 jobs sufficient to sustain growth. At the same time, the unemployment rate is still near 50-year lows. Paired with rising wages, consumer confidence has remained high, driving continued spending. Year-over-year spending was up by 2.1 percent in May.

Despite these positive signs, we may not entirely escape the impending recession, Cooper said.

“Almost all recession probability indicators are flashing danger signals,” she said.

But in comparison to recent recessions, this one is expected to be mild. Forecast to begin in the fourth quarter, this recession will show a decline of 1.5 percent from peak to trough, Cooper said, citing economic forecasts from Oxford Economics. She noted that this drop might not even last long enough to meet the official definition of recession from the National Bureau of Economic Research.

Rent growth plummets as supply continues to outstrip demand

What do these economic fundamentals mean for the multifamily sector? Jay Lybik offered a close look at the takeaways from Q2 data, highlighting the positive signs within a challenging market.

Demand, while still insufficient to absorb the record supply currently available, has shown an uptick, with over 107,000 units of absorption in the second quarter. This is the highest absorption the market has seen since the third quarter of 2021 and may indicate a demand recovery.

Demand for three-star properties reemerged for the first time since 2021, a positive sign for rent growth in the mid-priced category. Rent growth for this price point was 50 basis points higher than the country as a whole by the end of the second quarter, while the rent growth for four- and five-star properties dipped into negative territory at -0.2 percent.

The rise in demand has been overshadowed by an excess of supply, with over 1 million units under construction and 520,000 units expected to be delivered in 2023. With 70 percent of the new units in the four- and five-star category, this additional supply has exerted downward pressure on the top end of the market, where vacancy is expected to grow from 9.1% to hit double digits by the end of the year.

The Midwest continues to drive rent growth

From a regional perspective, the recent reshuffling that saw the Midwest overtake the Sun Belt has continued, and the Midwest has seen the fastest rent growth nationwide since the first quarter of this year, thanks to its limited levels of new supply. The top rent growth leaders include Cincinnati, Northern New Jersey, Columbus, Indianapolis, and Chicago, while the Sun Belt’s Austin and Las Vegas markets have seen the largest reversals, with a 3.3 percent drop year over year. Like the Midwest, the Northeast has also maintained a relative balance between supply and demand.

In the Sun Belt, on the other hand, new units continue to flood the market. This region saw massive demand during the pandemic but today is struggling to find sufficient demand to meet the high supply. Sun Belt deliveries have increased by 64 percent since 2019, compared to 8 percent in the rest of the country. The markets most at risk for oversupply include Atlanta, Phoenix, and Raleigh, alongside the Florida markets of Fort Lauderdale, Jacksonville, Miami, and Orlando.

Rebound ahead?

Zooming out to the national picture, rent growth remains weak. Three-quarters of the top markets won’t match their five-year pre-pandemic averages, Lybik said, with a whopping 17 markets expected to see rent losses by December.

“Overall, 2023 will remain a challenging year for the multifamily sector,” Lybik said, “as the supply and demand imbalance persists at the top end of the market.”

If, however, demand for mid-priced apartments continues to recover as expected, this rebound could help stabilize the overall multifamily market in the months ahead, he said.