The pandemic changed many things worldwide, and the multifamily market is no exception. The market began drastically changing in 2021 when demand increased to a magnitude never seen before. Many factors contributed to this, including remote work fueling the desire to upgrade space and its new-found flexibility allowing employees increased mobility. Government stimulus gave a large swath of citizens more disposable income, including the Federal Reserve lowering the interest rates to record low levels. The spike in demand began the path to higher rents, construction of new apartments, and increased occupancy. Lower interest rates and higher home prices also contributed to increased demand. People wanted to sell their homes at the highest price possible, but the availability of new homes and an often-surprising price led to a shift from the property owner to property renter. For the first time in history, more than half of the apartment leasing agents in the nation spent their days telling prospects that nothing was available. By October 2021, the National average occupancy reached almost 95 percent.
The multifamily industry was operating at peak performance going into 2022. Renewal offers were sent with significant rent increases, occupancy remained extraordinarily high, and turnover was low. But as 2022 progressed, the macro-environment changed as the Federal Reserve enacted seven increases in the Fed Funds interest Rate to fight inflation. This rapid increase has had many repercussions, including dramatically slowing the homebuyers, thus, reducing new home inventory construction. In addition, new multifamily construction projects are being delayed because of rate and cost increases. These two dynamics should help to minimize an oversupply of housing.
So, where are we trending now? For the first time in 18 months, the national occupancy average is down under 92 percent. Rents previously increasing on average by 6.6 percent are now down to 2.9 percent. Construction that began early in the year is ultimately expanding the supply of apartment homes. As we are stable now, experts say we are trending downward and must prepare.
Hopefully, managers in the multifamily industry were planning for the inevitable market cycles. If you have been in this business for nearly two decades, you have experienced at least one of the most dramatic housing cycles, including the Great Recession. With a record recovery from pandemic lows, history tells us that the market cycle would eventually top out. Leasing Managers should have prepared for this, but if you did not, you could begin now. Create a waiting list and review your marketing plan to analyze proper targeting. Sometimes people start looking for an apartment home early. Encourage them to go ahead and apply to get on the waiting list. Temporarily waiving the application fee may be prudent. If you have an entire list of people interested in leasing a new vacancy, facing a significant turnover doesn’t feel daunting. A priority on resident retention is equally necessary and usually the most cost-effective marketing practice since the turnover cost may soon exceed the rent increase opportunity. Tenant appreciation needs focus, and service levels must be robust. Additionally, as rent increases continue at a slower rate, having some flexibility on rental rates is wise, leaving you some room for negotiation.
There is no arguing that the pandemic created unpredictable factors for the multifamily industry. Similarly, the rapid increase in the interest rates in 2022 brought forth the top of the market cycle. As property managers, we must be proactive and prepare our communities for revenue stability.