Rent and Operating Trends – Week of August 6th 2023
A wave of multifamily maturities has been building for the better part of three years. Loans originated in late 2020 and 2021, held historically low initial interest rates, and experienced some of the fastest rent growth in history during their first year. While economic and multifamily fundamentals have changed, beginning in late Q1 2022, there was little concern for the value of multifamily assets until early this year. The speed and consistency with which interest rates rose surprised many. We began analyzing the impact of rising interest rates on floating rate debt in a paper published in April. But only now, a few months before the initial loans from late 2020 come due, is this becoming a major story outside our industry. Today’s Wall Street Journal ran an article looking at the volume of loans coming due in the next few years and the impact higher rates will have on valuations. Other major media outlets are starting to cover foreclosures in markets including San Francisco, Houston, and Los Angeles. Some metros are performing better than others from an operational perspective; however the impact of rising rates will hurt all markets, and very few if any will escape unscathed over the next 18 months. Multifamily loans with fixed rate debt will perform significantly better and are positioned to potentially weather the storm, but floating rate debt and the properties that are financed with it will feel the brunt of the pain from falling valuations.
Multifamily fundamentals had a decent week last week, with occupancy and ATR improving, while traffic and leasing were flat and NER declined modestly. Historically, operating metrics oscillate in the third quarter, before declining steadily in the fourth quarter. I expect this year will follow a similar trend and the next few months will show some upward and downward movement, but an overall flat outcome.
Key Takeaways – Data as of 08/06/2023
Traffic and Leases:
Traffic and leases were both unchanged at the national level, last week.
Dallas and Houston continue to lead the nation in average traffic per property, however both markets have fallen below 12 tours per property per week. In years past, national traffic has peaked above 12 per property and yet this year, the leading markets are no longer garnering 12 tours per week.
The Texas metros also lead the nation in overall leases signed per property, yet Colorado Springs leads all markets with a conversion ratio of 44%. The southern Colorado MSA is dealing with significant new supply pressure, yet the demand for apartments remains. Despite the lower-than-average traffic numbers, the leases signed in the market are high.
Occupancy and ATR:
Nationwide occupancy increased two basis points last week. On an annual basis, occupancy is down 1.02%.
Most markets had a strong week last week, as occupancy increased in about two thirds of the metros tracked by Radix Research.
Leading the way was Tucson, gaining 15 basis points of occupancy last week alone. Tucson is one of the better performing occupancy markets on a long-term basis as well. Occupancy has only fallen 50 basis points in the last year in the southern Arizona MSA.
The number of units available nationwide continues to improve. As of last week, the average property had 14 units available to rent in the next 60 days.
Net Effective Rent:
Net effective rent dropped 10 basis points last week.
Rents fell the fastest in San Antonio, a market that has also been plagued by rapidly declining occupancy. Net effective rents fell 80 basis points last week in San Antonio, and have fallen 2.6% over the past year.
Only 8 of the 33 markets tracked by Radix Research registered rent gains last week, led by Albuquerque, Charleston and San Diego.