By Chris Bruen, Senior Director, Research, NMHC
Multifamily executives held their collective breath throughout most of 2023. Apartment rents were virtually unchanged in 2023 as the highest level of deliveries in more than three decades offset strong demand. The Federal Reserve (the Fed), meanwhile, continued to tighten monetary policy in the presence of sticky inflation figures and a strong labor market, resulting in both shrinking capital availability and a higher cost of capital for apartment firms. This tricky combination of tepid rent growth and fresh financing challenges led to a sharp pull back in apartment construction and sales volume as well as negative returns to apartment investors. Apartment sales suffered, with volumes coming down from the previous year.
Yet, amid these market headwinds, some notable deals still took place during 2023, leading to several changes in this year’s NMHC 50 rankings of leading apartment firms.
The outlook early in 2024 is one of cautious optimism for the U.S. apartment market. On the plus side, demand fundamentals are solid. The economy continues to grow and add jobs at a healthy pace despite restrictive monetary policy, creating more demand for apartments. Fed officials also anticipate rate cuts over the coming year as inflation nears their 2% target. However, high levels of deliveries will likely continue to suppress rent growth over the coming year, while increasing operational costs related to things like insurance and fraud eat into operators’ bottom lines.
Historic Increase in Supply Causes Apartment Market to Loosen
Demand for apartments increased significantly in 2023. Nearly 234,000 professionally managed apartments were absorbed over the course of the year, according to data from RealPage. This is up significantly from the -123,290 units absorbed in 2022.
This demand was met, however, with a deluge of new supply. Multifamily completions rose 22.1% in 2023 to 438,500 units, according to data from the Census Bureau, marking the highest number of annual deliveries since 1987.
This expansion of the apartment stock caused market conditions to loosen throughout 2023. Respondents to the NMHC Quarterly Survey of Apartment Market Conditions reported looser market conditions in January, April, July and October 2023 and again in January 2024.
After peaking at 15.3% in 1Q 2022, annual rent growth tracked by RealPage moderated for seven consecutive quarters, reaching just 0.2% year over year in 4Q 2023. The apartment vacancy rate similarly rose to 5.8% in the fourth quarter of 2023—up 90 basis points (bps) from the previous year—marking the highest vacancy on record since 1Q 2012.
Yet, because there is a significant lag between changes in asking rents— what renters must pay to sign a new lease—and the rent component of inflation, which measures what renters are currently paying for housing, growth in the shelter component of CPI has only started to moderate from the highest rate in decades.
Annual shelter inflation, as measured by the CPI, peaked in March 2023 at 8.8% before cooling to 6.5% in December. Core inflation—driven by this lagging shelter figure, which accounts for roughly 40% of core CPI—remained well above the Fed’s 2% target, maxing out in September at 6.6% annually before moderating to 3.9% in December.
The Federal Reserve, in its continued effort to rein in inflation, raised its federal funds rate by a full percentage point in 2023. This increase in rates, coupled with tightening lending standards, caused a marked decrease in the availability of capital throughout the year. Respondents to the NMHC Quarterly Survey of Apartment Market Conditions reported worsening conditions for both debt and equity financing in January, April, July and October 2023.
The combination of a rising cost of capital and a softening apartment market has had a significant, negative effect on apartment construction, apartment transaction volume, as well as returns to apartment investors.
Apartment Construction Pulls Back Sharply in 2023
Multifamily permits (5+ units in structure) fell 6.2% in the fourth quarter of 2023 to a seasonally adjusted annual rate (SAAR) of 456,300, according to the Census Bureau’s data on new residential construction, a 24.6% decrease from 4Q 2022. Annual multifamily permits issued in 2023 similarly decreased 19.9% from the previous year to a total of 508,600.
While multifamily starts (5+) ticked up 0.8% in 4Q 2023 to a SAAR of 396,300, this represented a 27.1% decrease from the year prior. For the year, multifamily starts fell 14.2% to 455,500.
Apartment Sales Retreat, Private Owners and REITs Remain Net Sellers
In the apartment transaction market tracked by MSCI, sales volume decreased 17.0% to $26.9 billion in 4Q 2023, down 50.0% from the previous year’s fourth quarter. On an annual basis, transaction volume fell 61.1% to $119.0 billion, marking the lowest level of sales since 2014.
Private owners remained both the largest buyers and sellers of apartment properties in 2023, accounting for 66.0% of all acquisitions and 70.6% of dispositions by volume. Institutional/ equity funds were responsible for the second-highest share of annual transaction volume, with 22.0% of acquisitions and 20.6% of dispositions.
Private entities were the largest net sellers in 2023, with $5.5 billion in net sales, followed by REITs ($1.2 billion). The year’s net buyers consisted of institutional/equity funds (+$1.7 billion), cross-border funds ($1.5 billion) and other or unknown entities (+$3.5 billion). Looking back over the past five years, institutional/equity funds have been the largest net buyers by far, expanding their holdings by $25.4 billion, followed by other or unknown entities (+$24.9 billion) and cross-border funds (+$2.9 billion). Private owners have been the largest net sellers over the past five years, reducing their holdings by $26.4 billion, followed by REITs, which disposed of a net $16.8 billion.
Apartment Returns Turn Negative
From mid-2021 to mid-2022, historic levels of market tightness and rent growth translated to outsized returns for apartment investors. The combination of rising interest rates and moderating rent growth throughout 2022 and 2023, conversely, has resulted in lower apartment valuations and negative returns to investors.
The total, unlevered return for apartment investors fell to -7.3% in 2023, according to data from the National Council of Real Estate Investment Fiduciaries (NCREIF), marking a notable retreat from the 7.1% returned in 2022 and 19.9% returned in 2021. This also marks the lowest annual return for apartment investors since 2009, when, in the aftermath of the subprime mortgage crisis, returns fell to -17.5% year over year.
REITs were quicker to respond to these changing market fundamentals, returning -32.0% in 2022 and then rebounding somewhat (+5.9%) in 2023.
Cap rates increased for the sixth consecutive quarter to 5.5% in 4Q 2023, according to data from MSCI, the highest rate since 3Q 2019. The average price per unit also fell by 2.8% in 4Q 2023 to $204,800, down 9.9% from the previous year.
Newsworthy Deals and Changes in the Rankings
Greystar came in as the largest owner, manager and developer, in NMHC’s 2024 rankings. This marks the 14th consecutive year in which Greystar earned the top manager spot, while the company moved up from No. 2 in both last year’s Top Owners and Top Developers lists.
Nuveen, which is a subsidiary of the Teachers Insurance and Annuity Association of America, purchased an affordable housing portfolio of more than 12,000 apartment units in 2023 from Omni Holding. This purchase helped Nuveen grow its apartment portfolio 15.4% and earned the company the No. 4 spot in this year’s ranking of apartment owners, up three slots from last year.
Lincoln Property Company’s Residential Division rebranded as Willow Bridge following the company’s acquisition by Toronto-based Cadillac Fairview in 2023. Willow Bridge was the fourth largest apartment manager in NMHC’s 2024 ranking, down from No. 2 last year.
Asset Living expanded its units under management by 43.7% in 2023 through its acquisition of Denverbased BMC Management (which had more than 5,000 units in its portfolio), Atlanta-based SMP (25,000 units) and Atlanta-based First Communities (50,300 units). This growth earned Asset Living the No. 2 spot on this year’s Top Managers list, up from third in 2023.
RPM Living similarly grew its management portfolio 52.2% in 2023, climbing three spots to the third-largest manager on the 2024 NMHC 50.
AOG Living made the NMHC 50 Managers list for the first time at No. 46, growing its portfolio 25.9% in 2023.
The Outlook for the Year Ahead
Despite facing significant challenges in 2023, including stagnant rent growth and tightening monetary policy, the U.S. apartment market is showing signs of resilience and potential for recovery in 2024. Despite decreased construction and sales volumes, notable deals occurred, indicating investor confidence in the underlying fundamentals and long-term outlook for the industry. With a solid economic foundation and anticipated rate cuts from the Federal Reserve, coupled with strong demand for rental properties, cautious optimism prevails for the multifamily sector.
Staff Resource
2024 NMHC 50
Check out the full April 2024 issue of Multifamily Executive