In the past quarter, multifamily national vacancy rates have risen to 6.7% and rental rates have begun falling across the country, and there are three key reasons for these changes.
Firstly, the COVID-19 pandemic has led to an increase in remote work, causing many renters to leave more regulated urban areas and move into more affordable suburbs and smaller cities that had fewer restrictions. Vacancy dropped to a record low of 4.7% during the third quarter 2021, but now as of April 2023, the Covid emergency has been officially lifted and many people are returning to their living and work situations that existed before the pandemic.
Secondly, the supply of rental properties has been increasing with a current pipeline of 1.04 million new units in process. With higher land costs, construction and material costs the multifamily developers and investors used proforma rents which were set very high to accommodate the demand and recoup rising construction/land/labor costs that have gone up steadily since 2020. In 2022 over a half million new units came online and most were higher end rentals. High end apartments currently have 8.8% vacancy, where lower grade apartments are currently at 5.1%. We are now seeing this increased supply stoking competition and putting downward pressure on prices starting at the higher end.
Finally, many renters are struggling financially due to job losses and reduced incomes, making it harder for landlords to maintain their rental rates as tenants find ways to consolidate living situations and save money.
We are seeing a disparity between Capitalization Rates and interest rates, especially in multifamily sales. It will be interesting to see if the entire 1.04 million apartment pipeline fully materializes or if the downward pressure on rents will cause investors and developers to reposition themselves and their properties to still pencil and make financial sense.
If you would like more information on Multifamily properties in Boise or Reno, please give Stark Accelerators Commercial Real Estate a call at 208-722-2400 or 775-825-4400.