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Rent and Operating Trends – Week of March 19th 2023

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Rent and Operating Trends – Week of March 19th 2023

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After a turbulent week in the economy last week, all eyes will shift to the Federal Open Market Committee meeting, scheduled to take place Tuesday and Wednesday. The Fed has already begun slowing the pace at which they are raising interest rates, and economists believe that the failures of Silicon Valley Bank and Signature Bank can be traced back, in part, to the rapid rise in rates. Inflation continued its slow decline in February, with the annual CPI registering a 6% increase. The Fed may choose to pause its rate hikes in an effort to calm the market and mounting fears of a hard landing and an oncoming recession. However, many Fed governors still support raising rates. The results of this week’s meeting will be indicative of what we can expect in the multifamily transaction market through the spring and summer. If the Fed does not raise rates this week, I anticipate multifamily investors, many of whom have been waiting on the sidelines for a stronger buying opportunity, to re-enter the market. On the contrary, if the Fed raises rates, even by 25 basis points, I expect that to signal an even slower period for transaction activity than we’ve seen in recent months.

Multifamily leading indicators strengthened last week, while the lagging indicators were either unchanged or slightly negative. Traffic and leasing both increased nationwide, while NER was flat, and occupancy declined modestly. The continued steadiness and strength of operations in multifamily is partly contributing to the slowdown in transactions. Sellers are looking at the continued performance of their assets and holding firm on their lofty valuations. Buyers who are grappling with significantly higher interest rates than at any point in the past 15 years are not willing to accept such slim returns considering the increased interest expense. As a result, the bid-ask spread between buyers and sellers has widened.

Key Takeaways – Data as of 03/19/2023

Traffic and Leases:

  • Average traffic nationwide increased to 8.3 tours per property last week. The average property signed 2.5 new leases per week, bringing the national conversion ratio back above 30%.
  • Boston posted strong traffic numbers, with the average property in the market seeing more than a half tour per property increase compared to the previous week. While traffic remains well below the national average, the growth indicates continued steadiness in some of the Gateway markets.
  • Only 5 markets registered weekly traffic declines last week, led by San Jose.

Occupancy and ATR:

  • Nationwide occupancy fell 1 basis point last week.
  • New supply is once again a factor in many growing sunbelt markets. While these markets maintain some of the strongest demand in the nation, demand has declined from its peak in 2021. Developers are still adding units in droves however, and there will likely be short term pain for properties in close vicinity to new lease ups.
  • ATR increased 60 basis points nationwide last week, and the average property has 18 units available.

Net Effective Rent:

  • NER was flat last week, and the national average NER is $1,872.
  • Chicago continues to perform well as rents popped 50 basis points last week. Chicago has traditionally been one of the more affordable Gateway markets, however it recently passed Washington D.C.
  • Baltimore, Jacksonville, and Houston also posted steady rent growth last week.

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