Record Multifamily Unit Completions Fuel Imbalance Between Supply and Demand

Apartments.com has released an in-depth report of multifamily rent trends for Q4 of 2023, which revealed that throughout the year, a record number of units were delivered, presenting varying supply and demand challenges across the country.

“The U.S. multifamily market staged a strong rebound in 2023 as the number of units absorbed rose by 122% year-over-year to 332,000 units,” said Jay Lybik, National Director of Multifamily Analytics at CoStar Group. “While the increase in demand was impressive, it was overshadowed by the influx of new units, causing imbalances in supply and demand and pushing vacancy rates higher. With fewer unit completions slated for this year, 2024 may offer some reprieve for the multifamily market.”

Record Unit Completions Result in Supply-Demand Imbalance, Higher Vacancy Rates

In 2023, 565,000 new units were delivered, the highest number of units completed since the mid-1980s. The record number of deliveries caused an imbalance between supply and demand, pushing the vacancy rate higher from 7.3% at the end of September to 7.5% in December, marking the ninth-consecutive quarter in which supply outpaced demand.

As a result, vacancy was over 100 basis points higher at the end of 2023 than it was at the end of 2022.

Analyzing Annual Rent Growth

With vacancy rising throughout 2023, average annual asking rent growth decelerated from 3.9% at the start of the year to 0.9% by the third quarter, remaining there until year-end. Midwest and Northeast markets avoided oversupply conditions and maintained strong rent growth throughout the year.

In the South, oversupply pushed rent growth into negative territory while markets in the West experienced a mix of weak demand and limited completions over the past 12 months, keeping rent growth restrained but positive.

Orange County, CA, Ends 2023 with the Strongest Annual Rent Growth, Sun Belt Cities Lag

Of the top 50 markets across the country, Orange County held the strongest annual asking rent growth for the year at 3.9%. Louisville and Northern New Jersey were close behind, both at 3.7%. The majority of the 10 best performing markets for annual rent growth are in the Midwest or Northeast.

On the other hand, rents fell by 5.1% over the year in Austin, followed closely by Jacksonville, Charlotte and Atlanta with annual rent losses ranging from 4.8% to 2.6%. Eight of the 10 worst-performing markets in 2023 were in the South, due to supply-demand imbalances.

Demand for 3-Star Properties Rises, 1- And 2-Star Properties Remain the Weakest

Over 300,000 units across 4- and 5-star properties were absorbed in 2023. However, with the majority of new supply coming into the luxury market, annual asking rent growth decreased in this segment, finishing the year at negative 0.4%.

In contrast, demand for 3-star properties rose, with net absorption rebounding from negative 18,000 units in 2022 to a positive 64,000 units in 2023, helping to keep rent growth positive for this sector at 1.4%. The demand for 3-star properties was due in large part to improved consumer confidence, lower inflation and lack of a recession.

Demand for 1- and 2-star properties remained the weakest, with 2023 marking the second consecutive year of negative absorption. Households at this price point continued to struggle with higher costs for housing and everyday items, pushing some to seek alternative housing solutions, such as moving in with roommates or returning to family homes.

A Positive Outlook?

After reaching a 40-year record high for unit completions in 2023, the multifamily market may be able to recover some in 2024. Only 444,000 units are projected to be delivered in 2024, a 25% pullback from the previous year.

However, property operations going into the year vary widely depending on the market and price point. Markets in the South and luxury properties remain most at risk for further weakness due to oversupply, while Midwest and Northeast locations and mid-priced 3-star properties could outperform.

To read the full report, including more data, charts, and methodology, click here.