Multifamily rental growth and occupancy update year-end 2023

This analysis looks at overall occupancy levels and rental growth trends for twelve markets across Texas, Arizona, Georgia, Tennessee, North Carolina, and Florida.

Occupancy

As 2023 ended, the seasonal slowdown continued to drop occupancy levels in all metro areas. This seasonal slowness, coupled with strong new construction deliveries, caused occupancy levels to settle.

The table in Figure A compares occupancy levels at the end of 2021 to those at the end of 2023.

As 2021 closed, occupancy levels were near all-time highs driven by the spike in leasing activity with the economic reopening from COVID shutdowns. Occupancy levels were dramatically lower at the end of 2023 as move-outs from older, more stable properties accelerated and new supply outpaced absorption or demand. Jacksonville suffered the largest drop in occupancy of the twelve metros listed below at 5.9%.

The magnitude of occupancy decline lessens as you move from left to right with Houston dropping only 2.5% from the highs of 2021 to the most current reading of 89.0%. The yellow highlights draw your attention to those markets whose overall average occupancy dropped below 90%, a threshold where a market transitions from a ‘Landlord Market’ to a ‘Renter Market’ and concessions prevail.

Figure A – Occupancy Trend – Year-end 2021 through December 2023

The forces pushing occupancy lower have been in place for many months now. Move-outs in Classes B, C and D began in 2022 and have continued through much of 2023. Residents seem to be vacating in protest of higher prices and lower value.

In addition, deliveries are outpacing demand or absorption. New construction deliveries in 2023, as well as in 2024, will be well above long-term averages due to the historic levels of new construction. These elevated deliveries are poorly timed as job growth is settling back to growth in the 2% to 3% range.

Figure B illustrates how the variance between ‘Units Delivered’ and ‘Units Absorbed’ in the past 12 months impacts occupancy in each metro area. In addition, the ‘Units Delivered as a % of Overall Supply’ column is a weighted comparison of new supply in each metro. This approach provides a metric to analyze and compare the varied degrees of over-supply among the metro areas.

Figure B – New Units Delivered vs Absorbed as of December 2023

The metro order in Figure B is based on occupancy percentage from lowest to highest, placing Austin in the first position with the lowest occupancy. It becomes apparent that Austin’s modest overall occupancy is a function of its large number of new deliveries at 25,418 units. This number of deliveries rivals that of Houston (25,485) and DFW (31,066), metros that are both two and a half times larger than the size of Austin in terms of Overall Supply in Units.

Further analysis shows that Austin’s new units delivered account for 8.3% of its overall supply, towering over the next closest metros, Charlotte at 6.6% and Nashville at 6.5%. Metros such as Austin, Charlotte, and Nashville have historically operated in the range of 4.5% to 5.5% when it comes to new supply as a percentage of overall supply.

All metro markets on this table are experiencing varied degrees of supply difficulty, particularly considering that 11 of the 12 markets represented are close to the 90% occupancy threshold or lower.

The good news is that this is a supply-side only analysis and that all issues of over-supply can be remedied with population and job growth. All these metro markets are masters of generating corporate relocations and are leaders in economic development, the fundamental elements for growth. Austin has repeatedly appeared at the top of job growth and economic development lists in the recent past.

In the spirit of full disclosure, more units will be added to 2023 deliveries as our researchers continue wrapping up the year’s data well into January. The process of adding units to supply numbers after 12-31-23 is similar to the process in which votes continue to be counted after the polls close on election day.

Current rent growth

The lower occupancy levels discussed above put rent levels under pressure. As of the end of December, 11 of the 12 markets we serve, demonstrated in Figure C, experienced negative rent growth during 2023. Houston’s rent growth continues to outpace all other markets at 0.9%. All markets realized lower rent growth through December.

Figure C – 12 Month Effective Rent Trend as of December 2023

Concessions become increasingly prevalent as occupancy levels falter and contribute more to the negative direction of rent growth.
Concessions are generally offered in one of three types of specials: months free, move-in, or floorplan. Each concession type lowers the market rent by some percentage to arrive at an effective rent.

Figure D provides an analysis of the prevalence and magnitude of Class A concessions in October, November, and December. The metro markets are sorted by the highest to lowest rent trends.

Houston shows the best rent trend and an incremental increase in the percentage of Class A units offering concessions from October through December. In addition, the magnitude of concessions being offered increased from -6.2% off-market in October to -6.9% in December. This double-sided increase in concessions deteriorated rent levels and effectively lowered trends.

Houston’s 12-month trailing rent trend at the end of September, just prior to the concession increases illustrated in Figure D, was 2.2%. Currently, Houston’s rent trend stands at 0.9%. Austin’s current rent, at the bottom of the twelve markets listed, is -5.3%. At the end of September, Austin’s rent trend was -3.1%.

Figure D – Class A Concessions Analysis from October through December 2023

Concessions are likely to remain at these levels and possibly decrease in January. February will be a seasonal transition month from the doldrums of the slow leasing season to the more fast-paced March – August leasing period when the negative impact of concessions will become more moderate.

Wrapping up 2023 and looking forward to 2024

The curtain has closed on a difficult 2023 marked by excessive supply.

2024 will be another challenging year with construction levels coming off historic highs. The impact of these hefty new construction levels during 2024 will be considered poor timing as job growth is settling back to long-term averages of around 3.0 percent. The level of new units will keep a lid on Class A rent growth as concessions remain elevated.

There will be winners and losers on a property-by-property basis throughout 2024. Some properties will thrive and experience rent growth of +3% while others struggle to realize rent growth of -3%. Many properties will find their rent growth all along the +3/-3 spectrum of rent growth extremes. These varied results set the stage for flat overall rent growth in 2024.

Stay tuned as we continue this series with updated reporting on market conditions throughout 2024.

Interested in learning more? View additional detail on rental rate, occupancy and absorption trends in our monthly Market Line Reports.

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