These are the markets with the strongest rental growth in 2024 | Private Equity Weekly

Waves cannot climb forever. After two years of staggering rent growth, the multifamily market will peak in 2023 with growth rates as high as 11% to 12%.

Construction deliveries cushioned the wave, although low unemployment and high interest rates may have further boosted the market. While the multifamily market certainly won’t collapse, rent growth will be smaller through 2024.

Our budget is for growth of 3% in 2024, which may be slightly higher than the expectations of some US analysts. Take Freddie Mac as an example, Estimated national rental growth in 2024 2.5%, while Actual Page Estimated Growth Between 1% and 2%.

CBRE forecasts rental growth slowed to 1.2%. Analysts overwhelmingly believe supply is causing the growth slowdown. New construction began to depress rental growth in late 2023 and will continue into 2024. Inventories will be the main driver this year.

Multifamily housing may experience short-term instability this year, especially in certain markets, but smart budgeting will temper the turmoil. Some may find smart acquisition opportunities in 2024. Here’s how we see multifamily rental growth in 2024 and how to make the market work for you.

New supply exceeds demand

According to Apartments.com, new multifamily housing deliveries will reach 565,000 units in 2023, the highest level since the mid-1980s. Although the absorption rate is still surprisingly high, 122% increase from 2022 The surge in growth has impacted rental growth and occupancy rates, according to Apartments.com. Rental growth slowed in the fourth quarter of 2023, while occupancy rates stabilized at around 95%.

Jay Lybik, national director of multifamily analytics at CoStar, said: Fewer units completed By 2024, “there may be some relief” for the multifamily market. Nonetheless, supply remains the biggest impediment to rental growth.

Many analysts, including those at RealPage, expect construction supply line About 1 million units, indicating demand pressure for at least two years. Estimates of vacancies in 2024 vary: RealPage expected More than 600,000, while CBRE estimates 440,000.

Even as other economic forces (relatively low unemployment, rising wages, sluggish housing starts) persist, demand cannot keep pace with the surge in supply. There is too much new inventory to bolster demand. Therefore, we believe that 3% rental growth is a sustainable forecast.

Impact of housing shortage

Despite the oversupply of new multifamily housing, rental growth has not turned negative as home construction continues to lag. U.S. Census Data Showing new starts and permits have yet to regain growth momentum during 2020-21. Housing starts in 2023 will drop 9% from 2022.

Some economists expect home sales to start declining An upward trend in 2024 If the Fed cuts interest rates Expected to be by the end of 2023.The National Association of Realtors believes ‘Pent-up demand’ Especially in certain submarkets in Texas and the mid-Atlantic region. In fact, as renters become buyers, rental growth slows. However, we wanted to observe how tenants would respond to more housing supply.

Many renters live with what they see as an unfounded “stigma.” A fascinating RealPage study by the Center for Generational Dynamics found that 69% of renters feel “misunderstood,” 66% are happy to rent, and 63% disagree because they can’t afford a home. The housing shortage and generational shifts in the American dream of homeownership could have profound long-term effects on multifamily housing.

Where rental growth is strongest

Nashville, Tennessee has been a high-performing metropolitan area for many years, and we expect this to continue. Employment in the region grew 4.2% from June 2022 to June 2023, according to the U.S. Bureau of Labor Statistics and maintain its star status in the multifamily sector. Other cities we’re looking at include Charlotte, North Carolina; Austin, Texas; and Jacksonville, Florida.

Regarding rental growth, RealPage forecasts Top performing cities in 2024. The list features some expected names, such as the San Jose tech hub and desirable retirement areas in West Palm Beach, but also includes some big names.

Richmond, Virginia is Bring new jobs and residentswhile the Pittsburgh Urban Redevelopment Authority is leading an initiative Repurposing vacant office space Access multifamily housing inventory, including affordable housing options.

Other submarkets, particularly those in rapidly growing Sunbelt areas, may face challenges with rental growth and occupancy in 2024. However, willing investors may see an opportunity.

Find multifamily buying opportunities

The past year has generally not been kind to buyers, although investors who are prepared and have a long-term perspective can find opportunities.

“Weak fundamentals and rising borrowing costs have negatively impacted property values ​​and created significant buying opportunities for investors.” CBRE noted. CBRE recommends properties in the Northeast and Midwest as inventory to consider due to higher rental growth in these areas.

Additionally, investors would be wise to target mispriced or poorly managed properties where existing rents are well below market value. When units open, replacement leases will likely rise by more than 3%. We value these acquisitions where rental pricing can be higher than the standard 3% growth.

We’ve long looked at multifamily housing as a long-term investment because of its relative flexibility in balancing so many economic forces. As always, people need places to live.

However, tenants also require property managers to stay abreast of market and cultural trends. Otherwise, managers may swing between raising rents and replenishing units too quickly. Therefore, even the small increase in rents we may experience in 2024 could have a positive impact on the industry in the long term.

Multifamily investors should keep this in mind. Yes, many companies thrived during the boom years of the early 2020s. However, by understanding their tenants, the market and the property, they can also thrive during periods of more modest economic growth.

A six-month or one-year slowdown in rental growth is just one moment in a property’s life cycle. Investors who understand and prepare for this will be successful.