Despite a rebound in U.S. apartment demand throughout 2023, supply increases in the Sun Belt kept national rent growth to a minimum, according to a new report from Apartments.com.
That’s some good news mixed in with a concerning sign for an apartment industry battling high interest rates that have made it harder to build profitably. The South and West regions, which have been the focus of development for a good part of the past decade, are now exhibiting weakness as a result of job relocations and a more uncertain economy.
Annual growth in asking rents fell to 0.9% nationally in the fourth quarter from 3.9% a year earlier, according to Apartments.com, which is owned by CoStar Group, the publisher of CoStar News.
Austin, Texas, led U.S. rent declines, according to the report, dropping 5.1% year over year.
“The U.S. multifamily market staged a strong rebound in 2023 as the number of units absorbed rose by 122% year-over-year to 332,000 units,” Jay Lybik, national director of multifamily analytics at CoStar, said in a statement. “While the increase in demand was impressive, it was overshadowed by the influx of new units, causing imbalances in supply and demand and pushing vacancy rates higher.”
Roughly 565,000 new units became available over the past year, a level that hasn’t been recorded since the mid-1980s, according to the report. As a result, the U.S. vacancy rate grew by 100 basis points year over year to 7.5% in December and marked the ninth consecutive quarter that supply outpaced demand.
Supply and vacancy increases were largely focused on the South and West, the report said. Oversupply caused rent growth to turn negative in the South, with asking rents declining 0.2%, while a combination of weak demand and less construction over the past year limited rent growth in the West to 0.4%.
Rent growth in the Midwest and Northeast, markets that largely avoided the oversupply issues seen in the Sun Belt, remained strong at roughly 2.5% year over year.
Similar findings from the National Apartment Association reported national rents declining 1% year over year in December after five straight months of negative monthly changes. Rents were down in 60 of the 100 largest U.S. cities on a yearly basis led by Austin, according to that report.
Lagging Markets
Eight of 2023’s 10 worst-performing markets were in the South, according to Apartments.com. The Texas capital was followed closely by Orlando, Florida, where rents fell by 4.8%. Rents also fell on an annual basis in Jacksonville, Florida; Charlotte, North Carolina; Atlanta, Georgia; and Raleigh, North Carolina, falling between 3.4% and 2.4%.
Bucking regional trends, Orange County, California, saw the strongest annual rent growth among the top 50 national markets at 3.9%, according to Apartments.com. Asking rents in Northern New Jersey and Louisville, Kentucky, each grew by 3.7%, while Cincinnati and Chicago were the only other two markets to register rent growth of at least 3% year over year.
Rent growth was not evenly distributed across unit class either. Luxury apartments saw 300,000 more move-ins than move-outs in 2023, but the property class also dominated the number of new units available. As a result, rents among luxury units fell 0.4%.
Price growth among the lowest-priced units also struggled. The past year marked the second consecutive period that demand among these properties was negative, as many renters sought alternative housing through roommates or a return to family homes, according to the report.
Mid-priced properties, on the other hand, rebounded in 2023. From an 18,000-unit deficit in move-ins to a 64,000-unit surplus, rent growth in mid-tier properties was positive at 1.4% year over year. The report attributed the growth to heightened consumer confidence, lower inflation and the avoidance of a recession.
With new unit completions expected to decline by as much as 25% in 2024, some of the negative pressure on rent prices should wane deeper into the year, according to the report.
That “may offer some reprieve for the multifamily market,” Lybik said.
The report said that prediction is particularly true in Midwest and Northeastern markets, and among mid-priced, mid-tier properties. Notable exceptions are in the South and in the luxury market, where oversupply is predicted to remain an issue, the report said.