Multifamily Rents Declined at Record Pace in Q3
At the same time, the vacancy rate increased 10 basis points in Q3, which put it at 5.0% at quarter's end.
Job losses, combined with the expiration of unemployment benefits, may finally be taking its toll on the apartment market.
After multifamily held up reasonably well in Q2, national asking and effective rents declined at a record pace in the third quarter, falling by 1.8% and 1.9%, respectively, according to Moody’s Analytics REIS. That is the largest quarterly decline since 1999 when the company began publishing quarterly data. Before 2020, the most significant decrease occurred in Q4 2001—right after 9/11.
According to Moody’s Analytics REIS, asking rents tend to hold steady even as landlords offer concessions and have never declined by more than 0.7% prior to the current period.
As rents fell, it’s no surprise that vacancy rose. Moody’s Analytics REIS reports that the vacancy rate increased 10 basis points in Q3, which put it at 5.0% at quarter’s end. The long-term average vacancy rate in the sector ranges from 5.2% to 5.4%.
While the vacancy rate in Q3 was within the long-term average, it is the highest since the first quarter of 2012. Since 2012, vacancies have trended below 5.0%. The rate was 4.7% at the end of 2019.
Moody’s Analytics REIS noted that apartment performance usually lags the market, but the pandemic’s rapid shutdowns make 2020 unique.
“The complicating factor in this downturn was the immense amount of fiscal and monetary support dispensed to help the economy withstand the lockdown – with several policies like eviction moratoria and the Payroll Protection Program helping keep occupancy levels stable and rent collection losses relatively low,” Moody’s Analytics REIS wrote. “However, given the duration of the lockdown, and ongoing uncertainty about the speed and trajectory of the so-called recovery, even multifamily performance metrics have begun reflecting the strain.”
Widening Cracks
The report is the latest sign that cracks are forming in what is usually a strong asset class. Furthermore there is little in the way of relief on the horizon.
As vacancies rise, even more apartments are coming online. In Q3, 33,000 apartment units came online to push the year-to-date totals at just slightly above 110,000. Moody’s Analytics REIS says apartment developers are still confirming more than 225,000 units for all of 2020 (which is a decline of 27% from year-end 2019 projections). That means a lot of units are slated to come online in Q4.
When new developments come online during a recession, the entire submarket can struggle. A recent Fannie Mae report said that metros with higher rent levels and more construction see a substantially higher increase in concessions than lower-priced metros.