Multifamily Fundamentals & Outlook

Q3 by the Numbers

Muted Rent Growth Could Resume in Upcoming Quarters

Despite a record number of deliveries in the third quarter of 2024, the gap between annual supply (557,842 units) and demand (488,773 units) has contracted to approximately 69,000 units—the narrowest margin in two years(1). While stronger-than-anticipated demand has placed a floor on rents, increasing supply-side competition is capping price hikes; as a result, rents grew a modest 0.2% on a year-over-year basis(1). As tenants renew their leases and temporary rent concessions expire, rents could continue their upward ascent.

CBRE forecasts that high-supply cities experiencing negative rent growth could encounter stable or declining vacancy rates and positive rent growth within the next four quarters. Many markets bearing these characteristics—including Austin, San Antonio, Phoenix, Atlanta, Tampa, Jacksonville, Orlando, and Nashville—are within the Sunbelt, which may make multifamily assets in these locations particularly attractive to own over the near term.

Supply and Demand

Looking forward, today’s narrowing supply-and-demand gap could reverse course. Multifamily starts and permits are down 6.2% and 16.8% year-over-year, respectively,(2) thanks in part to an interest rate environment that has rendered many once-profitable projects uneconomical.

At the same time, these elevated rates are lifting rental demand. As rising mortgage rates drive up the costs of homeownership, which is now estimated to consume 34% of the median household’s income,(3) more would-be homebuyers are choosing to remain renters—a phenomenon that could elevate demand for multifamily rental housing. Compounding this effect is the dearth of inventory, which is driven by existing homeowners unwilling to sell because they are “locked in” to generationally low pandemic-era interest rates.

DLP Outlook

This dual combination of waning supply and rising rental demand is a tailwind for multifamily investors, and we expect market conditions in 2025 to be the most favorable they’ve been since 1H 2022.

In particular, the ongoing glut in supply could present unique opportunities to sponsors involved in ground-up development projects. As the delta between market values and replacement costs widen, newly-delivered units have the potential to create immediate equity for developers and their investors.

Additionally, we expect rent growth to stabilize at 2% nationwide and 3% in the Sunbelt. While modest, these figures are less muted than in the past four quarters. Still, this suggests that demand will have a limited impact on short-term returns. Instead, excess returns are likely to accrue to sponsors who can position themselves to address supply shortages through development, rehabilitation, or other value-added activities.

On a macroeconomic level, we expect interest rates to continue to decline. The Federal Reserve’s 50-basis -point rate cut in September 2024—the central bank’s first in more than four years—marks an end to the current hike cycle(4). The Fed funds futures market is pricing in another one to two quarter-point cuts by the end of this year,(5) which could dampen interest rates across the Treasury yield curve. As this happens, more capital will flow into the multifamily asset class, both from the equity and debt side. We expect $225MM in new inflow into DLP Capital sponsored equity funds and $330MM into DLP Capital sponsored credit/lending funds.

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Sources

1 - All figures as of September 2024 as reported by RealPage Analytics.

2 - Seasonally adjusted rates as of August for buildings with 5+ units Source: Censusgov, “Monthly New Residential Construction, August 2024,” September 18, 2024

3 - As of Q3 2024 as reported by Attom Data

4 - Board of Governors of the Federal Reserve System

5 - CME FedWatch