February 22, 2024

Apartment Starts Hit A 40-Year High In 2023. Don’t Expect A Repeat

We may see a reprieve in the number of new rental units coming online in 2024, with CoStar projecting a 25 percent pullback.

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In 2023, we saw the highest number of rental units delivered since the 1980s, leading to a dropoff in rental price growth and an increase in the rental vacancy rate nationwide.

However, in 2024, we may see a reprieve in the number of new units coming to the market, with CoStar projecting a 25 percent pullback in the number of rental units delivered, from 565,000 in 2023 to 444,000 in 2024.

“Last year we delivered the most new units since the 1980s,” Jay Lybik, national director of multifamily analytics at CoStar Group, told Inman. “This year, we’re projecting that number is going to drop to right around 450,000. That’s a positive because we’re hoping we can get the demand number up a little bit more.”

According to CoStar’s 2023 fourth quarter multifamily rental report, the multifamily vacancy rate was pushed higher during the last months of the year, from 7.3 percent in September to 7.5 percent in December, marking the ninth straight quarter that supply outpaced demand. Vacancy was over 100 basis points higher at the end of 2023 than it was at the end of 2022, according to the report.

Rental demand varied across different markets and price points throughout 2023, with the fourth quarter seeing a steep falloff in demand in the Sun Belt markets that saw the most construction over the past two years.

Austin, Texas, saw the steepest effects of oversupply, with rents falling by 5.1 percent from the fourth quarter of 2022 to 2023. Austin was followed by Jacksonville, Charlotte and Atlanta, where rents fell by between 4.8 percent and 2.6 percent year over year for the quarter.

Cities in the Northeast, Midwest and West, which have not seen as much of a building boom as the South, saw more sustained rent growth, with Orange County, California, seeing the strongest rent growth of the year at 3.9 percent, followed closely by Louisville, Kentucky, and northern New Jersey, both at 3.7 percent.

“It’s really the Sun Belt markets that have cratered because they have just been inundated with supply,” Lybik said. “All the developers in 2020 and 2021 rushed into Sun Belt locations and it takes two to three years once you break ground on a project to deliver; now all those projects are delivering, and this is the downside.”

Demand varies based on the price point as well, the report found, with the majority of new supply entering the luxury market, resulting in that sector experiencing negative rent growth of 0.4 percent for the year.

In contrast, demand for mid-market rental housing grew during the year, with those units experiencing rent growth of 1.4 percent during 2023, while demand for rentals on the lowest end of the market remained the weakest.

That contrast in levels of demand between the upper, middle and lower segments of the multifamily market has few equals throughout history, Lybik noted, with mid-market units being isolated from dangers of oversupply due to most new construction being in the luxury sector.

This is a very interesting time because I think multifamily has never been this heterogenous in, I think, its history,” he said. “We’re actually building luxury product today and that luxury product costs significantly more than the middle-priced product, so, to use Warren Buffet’s famous line, that middle of the market kind of has a mote there protecting it from oversupply.”

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