Q3 Multifamily Housing Market Shaped By Higher Rents, Lower Vacancies: Report

The U.S. multifamily housing market is being shaped by rising rents, lower vacancies and increased sales volume, according to the newly published Walker & Dunlop WD Multifamily Outlook for Fall 2021.

What Happened: The report observed that the effective rents were up 13.9% year-over-year during the third quarter of this year, with net absorption during the first nine months of 2021 being nearly double the pace of the previous two years.

Strong demand and low vacancy rates are causing rents to spike, the report noted, with major metro markets including California’s Inland Empire, Orange County and San Diego plus New York City and its neighboring Long Island suburb recording third quarter vacancy rates below 3%.

While demand for rental housing remains strong, the report warned that new completions as of the third quarter were 20% below the average pace recorded during the previous four years.

“Supply is expected to remain subdued in the near term as the number of projects under construction peaked in the first quarter of 2020 and has since continued to fall, ending the third quarter down 22% from peak levels,” the report said. “With supply lagging demand, vacancy rates plummeted over the past year.

“At 4.7% in the third quarter, vacancy is down by 70 basis points over the quarter and by 260 basis points from a year ago.”

This situation has created challenging dynamics in the affordable housing space, which only increased in size by 0.5% during the first nine months of this year.

“Vacancy rates, at 2.8% in 3Q 2021, are down by 30 basis points for the quarter and 80 basis points year over year,” the report added. “Effective rents are up by 2.9% year over year and have averaged 2.1% growth over the past ten years.”

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What Else Happened: Walker & Dunlop’s report also cited an 11% year-over-year rise in prices for multifamily projects during the third quarter, with Southeast markets posting the fastest regional growth due to the arrival of new institutional and out-of-state buyers.

“Overall, market cap rates remain steady and near 5.2% on average for the third quarter, similar to the previous quarter and down by ten basis points from a year ago,” the report said.

Furthermore, the report pointed out that while “the rental market is becoming more institutionalized, small owners continue to dominate the market. Private buyers continue to account for nearly two-thirds of the transaction market, as compared to REITs (4% of transactions) and institutional buyers at just over 20% of the market.”

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