Following record apartment activity in 2021, fundamentals are trending toward historic norms in 2022. To see how the U.S. is performing year to date compared to the Berkadia Research forecast, check out the 3Q22 National Multifamily Report.
3Q21 vs 3Q22
One year ago, renters occupied more than 268,900 additional units–a historic third quarter total. Leasing activity was nearly three times the third quarter average during the preceding decade.
These renters, on average, signed one-year leases. As the terms expired in the third quarter of 2022, nearly 56% of renters renewed their leases. The conversion rate was down from 58% one year prior.
The dip was part of a shift in rental demand, a piece of apparent pause in new household formation across most of the U.S. As a result, more than 82,500 apartment units were vacated than occupied during the third quarter of 2022. It was the first time in more than 20 years that net leasing activity was negative during the third quarter.
With negative absorption amid sustained inventory growth, U.S. apartment occupancy averaged 95.9% in the third quarter of 2022. While the rate was down from the historic peak in 2021, current occupancy was 40 basis points higher than the 10-year average of 95.5%. Occupancy remained tightest among Class C properties as many renters seek budget-friendly housing options and the asset class inventory sees little growth.
With U.S. occupancy dropping, though remaining at healthy levels, apartment operators moderated rent growth. After advancing 10.9% during the year prior, monthly effective rent increased 10.6% during the last four quarters to an average of $1,790 in the third quarter of 2022. Even with the sustained rent growth, renters made payments near the same rate as one year ago.
Markets Seeing More Move-Ins
While apartment operators in a majority of major metros recorded negative net absorption during the third quarter, a few secondary and tertiary markets had leasing activity at or near their 10-year averages: Charleston, Madison, and Omaha.
Residents continued to seek apartments at a healthy clip in the Nashville metro. Nearly 1,500 units were absorbed in the third quarter of 2022, leading all markets during the last three months.
Nashville apartment operators have benefited from key demographic trends exceeding the nation in the last year as employment expanded 6.0%, or by 63,700 jobs. At the same time, the total population increased 1.2%, with the key renter age group of 18 to 35-year-olds growing at a similar rate.
More jobs and residents led to a competitive homeownership market where the median price grew 10.0% year over year to more than $393,100 in September 2022. As a result, the cost of renting an apartment was on average 36% less than the median mortgage payment. Nashville also provides a lower cost of renting than other Mid-Atlantic and Southeast markets like Atlanta, Orlando, South Florida and Washington, D.C.
In the near-term, U.S. households are expected to again choose apartments as employers continue to bolster payrolls and the cost of homeownership continues to rise. As a result, RealPage forecast positive leasing activity in the fourth quarter that will carry over into next year.
Even with sustained demand, apartment leasing activity is projected to trail inventory growth to shift occupancy closer to the 10-year average. Apartment operators are expected to respond by adjusting effective rent levels. A seasonal drop is forecast for the fourth quarter, while rent growth next year is projected to fall just below the annual average over the prior decade.