Multifamily Momentum Trends Up on Lower Debt Costs, Higher Cap Rates
The multifamily real estate market is experiencing a positive shift, fueled by lower debt costs and increased cap rates. Many buyers who had been waiting on the sidelines due to financing challenges and softer market conditions are now starting to re-enter the fray, according to Marcus & Millichap’s third-quarter national report on the multifamily sector.
From July 2023 to June 2024, the average cap rate for multifamily transactions climbed to 5.8%, marking an increase of 110 basis points from last year’s record low. This is the highest cap rate seen since 2014. At the same time, sale prices are beginning to stabilize, as reduced uncertainty in financing allows buyers and sellers to negotiate more effectively.
Vacancy rates remained stable nationwide in the first half of 2024, following a 90 basis point increase the previous year. Primary markets, particularly urban centers, have exhibited the most consistent vacancy rates over the past year. Additionally, institutional investment activity appears to be rebounding, with dollar volume rising significantly in July and August.
While some areas are experiencing mild supply pressure—especially outside the Sun Belt—markets like Chicago, Cincinnati, Cleveland, Milwaukee, Pittsburgh, and St. Louis have seen rent growth supported by inventory expansion below 2%.
In the first two quarters of 2024, the multifamily sector achieved a net absorption of nearly 260,000 apartments, surpassing last year’s total by 35,000 units. This growth in household formation, combined with easing inflation, helped keep national vacancy rates steady at 5.8% at the start of the second half of 2024. However, this rate remains 40 basis points higher than the long-term average for the second quarter, as a historic level of construction continues to meet strong demand.
Currently, there are about 1 million multifamily units under construction across the country, which may create short-term supply pressures. Nonetheless, project starts have dropped by more than 18% year over year in July, and permit requests have decreased by 15%, indicating that development activity may have peaked.
To remain competitive, many property operators have begun offering concessions, with the percentage of apartments providing discounts rising to 14.1% in August 2024, up over 500 basis points from the previous year. While concession activity among Class A properties has stabilized after peaking in March, discounts are still prevalent in Class B and C apartments.
The upward momentum in the market has led to a 4% increase in annual rents for lease renewals, contrasting with a 0.8% decrease for new tenants. Many renters are opting to remain in their current homes due to challenges in first-time homeownership; only 26% of U.S. households qualified for a median-priced home loan from Freddie Mac in the second quarter of 2024, compared to a decade-long average of approximately 46%. The apartment renewal conversion rate also saw a rise, reaching 54.9% in August 2024, up 150 basis points year over year.
Source: GlobeSt.
