US Rent Growth Remains Flat in February, Occupancy Levels Steady

U.S. Rents Show Minimal Growth in February 2024

U.S. apartment rents enjoyed a marginal increase, with asking rents for professionally managed apartments rising by only 0.2% on a same-store basis in February 2024, according to data from RealPage. 

Setting the scene: This sluggish growth has been ongoing for 11 months, notably lower than the historical average of 0.6% monthly rent increase dating back to 2010. Although the February uptick of 0.2% was the largest monthly surge since June 2023, the momentum remains subdued, hinting at more muted rent growth in the foreseeable future.

Stable occupancy: Apartment occupancy remained steady at 94.1% in February, marking the third consecutive month at this rate. This stability could indicate that apartment occupancy is approaching a point of consolidation. However, the record-high construction activity in the apartment sector poses a challenge to occupancy levels in 2024, with nearly 962K units under construction nationwide by the end of 2023 and ~672K units expected to be completed this year.

Impact on rent: Markets with extensive new supply, such as Austin, Jacksonville, Nashville, Orlando, Phoenix, Salt Lake City, and Raleigh/Durham, have seen significant rent drops as of February. Austin, in particular, posted annual rent cuts of -6.7% due to an influx of new apartment units.

Leading the way: Markets with modest rental construction, like the Midwest and Northeast, saw notable rent increases, with rents rising +2.8% and +2.7%, beating the national trend. San Francisco, West Palm Beach, and Virginia Beach stood out by showing occupancy gains, especially in San Francisco and Virginia Beach, where both rents and occupancy improved in February.

➥ THE TAKEAWAY 

It’s all about supply: Rental housing economist Jay Parson says the doomsday forecasters underestimated the strength of apartment demand in 2023-24, and he’s not wrong. Despite predictions of major declines, apartment demand remained strong. This demand, coupled with a supply increase—reaching near 50-year highs—resulted in stable vacancy rates, even during the traditionally slow winter leasing period. While spreading demand across more properties, the surplus in supply exerted downward pressure on rent growth despite occupancy gains in some areas. The silver lining? Things are not as bad as they seem.

CBRE's Cap Rate Survey Reveals Yields Could Be Nearing Their Peak

The H2 2023 Cap Rate Survey (CRS) by CBRE indicates tighter lending standards and distress expected, but yields could be nearing their peak.

Digging into the data: Collected from over 250 industry professionals, this dataset of 3,600 cap rate estimates across more than 50 U.S. markets offers a critical look at investor sentiment during a period marked by investment caution and pricing dislocation. H2 2023 saw cap rates rise from 6.4% to 7%, propelled by bond market fluctuations with yields peaking at 5% then retracting to below 4%, indicating widespread cap rate growth across property sectors.

Zoom in: Stabilized cap rate estimates for properties in 2H23 show expansion, especially in commodity office assets. Class C urban properties saw a notable increase of over 100 bps, while suburban yields generally rose by less than 50 bps. Multifamily and neighborhood retail pricing remained relatively stable.

➥ THE TAKEAWAY

Expectations and projections: Survey respondents across property types largely expect no significant change in cap rates over the next six months. In the office sector, a higher share predicts further devaluations due to uncertainty. Expectations for cap rate increases in 1H24 decreased, possibly reflecting a more accommodative Fed policy and declining bond yields.

Freddie Mac’s (FMCC) serious multifamily delinquency rate, which measures the number of loans 90+ days late or in foreclosure, has spiked to a new all-time high this year above 0.40%, surpassing its late 2012 peak near 0.30% over 12 years ago.

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