The multifamily real estate sector in the U.S. has been experiencing an energetic year. During the third quarter of 2024, the U.S. economy absorbed 138,000 apartment units (the fourth-highest level on record), showcasing a strong demand driven by robust international migration and a stable labor market. This makes multifamily housing one of the most resilient sectors in the real estate market. In New York City, a hub for multifamily investment, these national trends are mirrored, with increased demand for rental units offering new opportunities and challenges for investors and developers.
However, the multifamily landscape is not without its difficulties. High vacancy rates, slowing new construction, and shifting rent dynamics pose challenges, especially in large metropolitan areas like New York. As new developments face higher financing costs due to interest rate hikes, there is a notable pullback in construction activity, which could tighten the supply pipeline in the near future. This multifaceted environment makes the current multifamily market an intriguing case for commercial real estate professionals, requiring a careful assessment of the opportunities and hurdles that lie ahead.
Q3 Breaks Record in Apartment Units
The resurgence of multifamily market, a classification of housing where multiple separate residential units are contained in one or several buildings, has been one of the most significant positive indicators in 2024. A record-breaking number of over 400,000 units were delivered this year, marking the highest three-quarter total since the year 2000. This boost in demand for multifamily units, such as apartments, townhomes, duplexes, triplexes, condominiums, and dorms, is evident in New York City, where a stable labor market and a resurgence in migration have fueled a renewed interest in rental housing. The strong absorption rates have kept vacancy rates relatively stable, with New York’s vacancy rate holding firm despite a record number of units coming online in 2024. As demand continues to grow, rent growth is beginning to accelerate, with a 2% year-over-year increase nationally, reflecting broader economic optimism and consumer confidence.
In addition to rent growth, the decline in new construction could potentially benefit existing properties in the long run. With fewer units being added to the market, competition among landlords could decrease, leading to improved occupancy rates and stronger rent performance. In cities like New York, where new multifamily developments often take years to complete due to regulatory hurdles, the limited construction activity may ease concerns over an oversupply, supporting sustained property values and rent stability. This creates a favorable environment for investors who can capitalize on the tightening market conditions by leveraging existing assets or acquiring well-positioned properties.
Rental demand in the US has surged in Q3, with net absorption exceeding 360,000 units year to date, a 44% increase over 2023. This is the first time that demand improved from the second to the third quarter since 2020 and only the second since 2012. (Photo: Zeeshaan Shabbir via Pexels)
But Construction Can’t Keep Up
Despite the promising signs of demand, the multifamily market faces several challenges that could impact commercial real estate strategies. One of the most significant is the slowdown in new construction, driven by high interest rates and financial uncertainty. Nationally, the number of units under construction has dropped to 609,000, a 36% decrease from its peak in early 2023. This trend is also visible in New York, where developers are cautious about initiating new projects due to rising borrowing costs and market risks. A shrinking pipeline could lead to a future supply shortage, potentially pushing vacancy rates lower but also driving up rents, which may limit affordability in key markets.
Rent growth, while positive in recent quarters, remains subdued compared to pre-pandemic trends. The national average of 2% year-over-year rent increase is still below the long-term average of 4% from 2010 to 2019. In New York, this moderated rent growth is partly due to the high number of units delivered this year, which has put a cap on how much rents can rise. Additionally, certain markets that experienced rent surges during the pandemic, like Austin and Phoenix, have seen corrections, highlighting the potential volatility in multifamily rent dynamics. In such an environment, real estate investors must be strategic, focusing on properties with strong fundamentals and considering long-term trends over short-term fluctuations.
Early Signs of Home Purchase Power
The 2024 multifamily market in the U.S. for Q3 is characterized by a delicate balance of opportunity and risk. On one hand, strong demand, driven by economic stability and a favorable labor market, provides a solid foundation for continued growth. This is particularly true in New York, where a combination of resilient demand and limited supply has maintained vacancy rates at manageable levels, even as the pipeline for new developments shrinks. Investors who can navigate this environment stand to benefit from the reaccelerating rent growth and potential increases in property values.
On the other hand, challenges such as rising interest rates and a constrained construction pipeline require cautious optimism. For New York’s commercial real estate market, the key to success lies in understanding the nuanced dynamics of supply and demand, as well as the impact of broader economic forces. Global real estate services firm Cushman and Wakefield sent a strong forecast that as the Federal Reserve initiates interest rate cuts, mortgage rates are beginning to decline. This trend could potentially draw some demand away from the rental market, showing early signs of a growing number of residents choosing to purchase condos or houses. Still, reports reflect that renting continues to offer a substantial cost advantage over homeownership, and demographic trends remain supportive of rental demand.
Reference:
Q3 2024 U.S. Multifamily Report, Cushman and Wakefield
