Rent and Operating Trends – Week of July 2nd 2023
The first half of 2023 has been marked by economic volatility, major regional bank failures, continued monetary tightening and ample talk of an upcoming recession. However, the overall economy remains on steady footing. GDP increased at a 2% annualized rate in Q1 according to the final estimate released last week. Employment remains the backbone of the economy, as the American labor force continues to add jobs at a very strong rate. The public equity markets have had a very good start to the year with the S&P 500 up 16.4% year-to-date. Inflation continues to decelerate, as the Personal Consumption Expenditures index posted a 3.8% annual growth rate in May. As of now, the soft landing that many economists were questioning when the Fed began raising rates at a torrid pace, is very much in play. There may be a slight recession, or the economy may continue its expansion. Either way, the magnitude of growth or decline will be limited in the second half of 2023 and into 2024.
Multifamily fundamentals remained flat to end the first half of the year, providing further evidence of a generally weak spring leasing season. Net effective rent is down 80 basis points year-over-year, and it is difficult to see that trend reversing over the course of the next six months. I expect a typical late Q3 and Q4 rent decline, which should keep year-over-year rent growth negative at the national level. Traffic and leases have yet to decline, but they did not experience significant growth during Q2. Spring is traditionally the strongest period for leading indicators, and the growth we’ve seen in past years just never materialized this year. Occupancy continues to decline and may drop below 94% at the national level if renter demand weakens further.
Key Takeaways – Data as of 07/02/2023
Traffic and Leases:
Traffic and leases were unchanged last week, as both metrics struggled to cross key thresholds. Traffic has not yet exceeded 9 tours per property nationwide, and new leases signed has yet to exceed 3 per property. While the conversion ratio remains relatively strong, the overall level of traffic and leases has fallen well below the high-water mark in recent years.
Dallas and Austin lead the nation in new leases signed, averaging 3.8 and 3.7 new leases signed per property per week respectively. Demand remains strong along the I-35 corridor, however both metros rank among the top in the nation for new supply. While residents continue to sign leases at a strong clip, overall market performance will suffer as new supply is absorbed.
Occupancy and ATR:
Nationwide occupancy fell 1 basis point last week. Over the past year, occupancy is down 1.16% on a same-store basis.
Only one metro, Minneapolis, has recorded an increase in occupancy over the past 12 months. While Chicago, Denver and San Francisco have performed relatively well with occupancy falling only modestly, Salt Lake City, Orlando, and Riverside, CA have experienced occupancy loss exceeding 1.8%
The continued delivery of new supply, especially in sunbelt markets will depress occupancy in a number of markets through the end of this year and well into next.
Net Effective Rent:
Net effective rent increased 10 basis points last week, however the overall rent trend remains concerning.
Rents are down on a year-over-year basis in roughly 65% of the markets tracked by Radix research.
However, perhaps the most notable evidence of a multifamily market returning to normal is that we are seeing a wide disparity between markets. Las Vegas lags all metros, as rents have fallen 7.7% over the past year. Phoenix and Austin are not far behind with rent declines of 4% or more. On the contrary, Tucson, Albuquerque, and Chicago have all experienced market wide rent growth of more than 3%.