Following a year in which absorption rose to over 660,000 units nationally, new supply has outpaced absorption in 1H22. Rising construction costs and labor shortages have caused a nearly 15% drop in expected deliveries for the year. Inventory growth is projected to rise meaningfully in 2023, reaching 2.8%. Vacancy will increase but remain at historically tight levels supporting continued rent growth.
Effective Rent Growth
Effective rent growth accelerated to 13.5% over the trailing twelve months, the highest rate on record. On a quarterly basis, rents grew by 3.1% on average in 2Q22. Rent growth is projected to increase into 3Q22 but will begin to taper off through 2023 as high levels of new supply are expected to put pressure on fundamentals.
Single Family Tightness
As the state of the current single family home market continues to price out would-be homeowners, the multifamily market reaps the benefits. Rising construction costs have led to a 41.4% decrease in single family home completions from 2007 to 2021. Home prices have also increased 50.5% since 2017, while the 30-year fixed rate mortgage average jumped 88.7% year-over-year in 2Q22.
Investor appetite surged in 2Q22 with $86.3 billion in sales volume, representing a 42.4% year-over-year increase, as well as the third largest quarterly sum in history. Volume in 1H22 accelerated 53.1% compared with 1H21 – an uptick inactivity was in part due to buyers and sellers deliberately transacting ahead of impending FOMC rate hikes and the mid-term elections later in the year.
Total returns through 2Q22 averaged 24.4% on an annualized basis, a 450-basis point increase from 2021. While inflation reached 9.1%, a level not seen in over 30 years, real returns for multifamily rose to 15.3% – significantly outpacing inflation, as has been the case over the past 40+ years with the exceptions of the early 1990’s recession and the Great Recession.
The cost of debt across instruments has risen dramatically. Should these higher debt costs be sustained – and all signs point to this being likely – then we expect to see more headline movement in yields in the coming quarters.