Multifamily Demand Surges Amid Rising Homeownership Costs

The gap between homeownership and rental costs continues to widen, driving a surge in demand for multifamily housing. According to Newmark's latest multifamily capital markets report, the affordability gap increased by 26.7% year-over-year in the second quarter of 2024, reaching $1,114.

This widening gap is primarily due to rising mortgage rates, which have made homeownership less affordable for many potential buyers. The Mortgage Bankers Association's Mortgage Application Index has declined by 48.4% since March 2022, when the Federal Reserve began raising interest rates. Applications are now at their lowest level in nearly a quarter century, as the 30-year fixed mortgage rate reached 6.86% during the second quarter.

Benefiting from decreased home affordability, multifamily demand increased by a staggering 102% during the second quarter. Rolling four-quarter demand accelerated to 389,629 units, which marks a five-quarter streak of improvement. The Sun Belt region, particularly Austin, Raleigh/Durham, and Nashville, experienced particularly strong demand, with growth rates averaging 64.4% above the long-term average.

New supply has also been on the rise. Just over 157,000 units were delivered during the second quarter, surpassing the previous record of 126,591 units delivered in the first quarter of this year. New deliveries are expected to continue accelerating in the third and fourth quarters of 2024 before slowing down in the first quarter of 2025.

Despite the high levels of new supply, rolling four-quarter starts and permits have declined from their peak in 2022. This suggests that the pace of new construction is likely to normalize in 2025 and 2026. Multifamily units under construction declined to 880,000 in the second quarter, down 11.4% year-over-year from its peak of 993,000 units in the second quarter of 2023. ?

Quarterly rent growth rose to 1.1% in the second quarter of 2024, while year-over-year growth remained nearly flat at 0.2% for the third quarter consecutively. However, year-over-year rent growth is projected to increase throughout the second half of 2024 and 2025 as fears of excessive new supply wane.

In terms of financing, $669 billion in multifamily loans are scheduled to mature over the next two years, primarily held by government-sponsored enterprises (GSEs) and banks. This is despite a decline in originations of 32% and 22% year-over-year, respectively. Commercial mortgage-backed securities have been a bright spot, with 167% year-over-year growth during the first quarter of 2024.

Sales volume rose to $38.8 billion in the second quarter of 2024, representing a 20.4% year-over-year increase. This positive change marks the first sequential increase in volumes since the second quarter of 2022.

Conclusion

The multifamily market continues to be a strong performer, driven by a combination of increasing demand and declining home affordability. As the gap between homeownership and rental costs widens, more renters are turning to multifamily housing. While new supply has been on the rise, it is expected to normalize in the coming years. This, combined with strong demand, suggests a promising outlook for the multifamily sector.

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Courtesy: ?Kristen Smithberg|