Overabundance of multifamily supply to impact rent, occupancy

Multifamily performance might face some challenges throughout the second half of the year as the market works its way through a historically high supply of new units, Freddie Mac's midyear outlook said Wednesday.

Because supply is outpacing demand in some markets, the government-sponsored enterprise forecasts below-average rent growth and downward pressure on occupancy rates for the remainder of the year.

Rent growth will likely teeter-totter around 2.7%, while the vacancy rate will increase to 6%, per Freddie. 

New-unit deliveries are currently concentrated in the Sun Belt and Mountain West regions of the country, where demand grew since the pandemic, the mid-year outlook said. This is contributing to a year-over-year rent decline of 2.2% in the Sun Belt and 0.6% in the Mountain West.

Sara Hoffman, senior director of multifamily research at Freddie Mac, explains that despite new supply being at a nearly 40-year high, it will be short-lived because these housing units are located in areas with high demand.

"That will cause multifamily performance to remain subdued this year, but over the longer term, the multifamily market appears primed for growth due to an overall shortage of housing, an expensive for-sale housing market and favorable demographic tailwinds," Hoffman added in a press release.

Compared to a few years ago, the pace of rent growth has decelerated from the prior 12 months. This is specifically impacting markets where rents increased rapidly during the pandemic boom, followed by a high churning-out of supply.

The GSE notes Austin, Texas; Jacksonville, Florida; Atlanta; San Antonio and Raleigh, North Carolina — all markets that saw booming rent growth during the pandemic — are now seeing the rate of increases slow and trend lower than last year.

Regarding the state of multifamily construction, the GSE notes that permits and starts peaked in 2022, but as of the first quarter of 2024 are down 33% and 37%, respectively. Due to construction timelines, the bulk of the units started in 2022 are expected to be delivered from 2024 through 2026, the housing agency said.

Freddie forecasts that due to elevated interest rates and volatility the multifamily market could show a modest recovery from the estimated 2023 levels to about $320 billion if market conditions get better in the next six months.