Multifamily REIT Execs Confront The 3 C's In Q3: Construction, Concessions, Competition

The American dream of homeownership slipping further out of reach is boosting multifamily demand and helping the industry keep its head above water amid threats posed by new supply deliveries and rising rent delinquency.

Spiking interest rates and high property values are keeping tenants in their rentals. That is providing multifamily communities with healthy occupancy and retention, executives of some of the nation's largest multifamily REITs said on third-quarter earnings calls over the past week.

But a rising number of tenants not paying rent and avoiding eviction for as long as possible is complicating the picture. Meanwhile, increased supply in all the wrong places is encouraging competition and concessions, with some executives saying they expect rent growth to temporarily slow as a result. 

The percentage of tenants moving out of AvalonBay Communities’ properties to purchase homes dipped below 10% this year, well below the long-term average, which hovers in the mid-teens, Chief Operating Officer Sean Breslin said.

“[The] difference between the cost of owning the median-price home and median rent in our established regions has increased by roughly 10 times if you look at the first three quarters of 2023 relative to the average during 2020, which certainly makes apartment living a more attractive option in these regions,” Breslin said during the company's Oct. 26 call.

Camden Property Trust is also seeing nearly the lowest level of tenants moving out to purchase homes in its 30 years of existence — just above 10%, President Keith Oden said.

Camden is similarly benefiting from the soaring popularity of living alone. 

“When you get close to a third of the people that are living alone, they don’t go out and buy houses. They rent apartments,” Chief Financial Officer Alex Jessett said during Camden's Oct. 27 call. “And so that older demographic becomes a higher propensity to rent apartments, and that stabilizes the system as well.” 

That stabilization is needed, as tenant behavior isn't back to pre-pandemic norms, Camden CEO Ric Campo said, citing high levels of identity theft and fraud and elevated skips and lease breaks.

Camden isn't the only REIT to struggle with fraud and nonpayment from tenants. Essex Property Trust's rate of rent delinquency was almost 2% in the first nine months of this year, or about five times the historical average, Essex President and CEO Angela Kleiman said.

“The unprecedented eviction protections enacted during Covid exacerbated by subsequent court delays has resulted in protractive exposure to nonpaying tenants and uncertainty on timing of when we could recapture these units,” she said on the company's Oct. 27 call.

Delinquency is dropping over time, though, as tenants come to terms with the reality that pandemic-era protections and rental assistance are no more and they gradually move out, Essex Senior Vice President of Operations Jessica Anderson said. Eviction-related move-outs increased in September, improving delinquency as a percentage of rents to 1.9% in September and to 1.3% in October, she said.

Tailwinds, including continued job and wage growth and relative price point affordability versus alternative housing options, served as a break against a rush of apartment deliveries during the quarter, UDR CEO Tom Toomey said.

But as a result of competition from new supply, UDR offered more concessions than usual, said Michael Lacy, senior vice president of property operations. UDR’s average portfolio-wide concessions increased threefold over the quarter, from half a week to 1.5 weeks of free rent, he said.

San Francisco and Sun Belt markets are among those most affected by new supply, Lacy said, with average concessions hovering at about three weeks and ranging up to six weeks free.

“Concessions in many of our markets increased rapidly and began to compete directly with B-quality product,” Lacy said. “This was something we did not expect and placed our brands in occupancy under more pressure than originally anticipated.”

Toomey said the impact of new supply on UDR's Class-B product was something he hadn’t seen in over three decades in the multifamily industry.

UDR expects the concession-heavy dynamic to continue throughout the fourth quarter and into 2024, Lacy said. Rent growth next year will likely be below the long-term average of about 3% due to the negative impact of new deliveries combined with potentially lower demand going forward, he said.

But the construction pipeline is slowing. Annualized August starts fell 42%, Camden’s Campo said, and research conducted for Camden by Witten Advisors projects starts will fall to 250,000 units in 2024 and just above 200,000 units in 2025. 

Nashville and Austin are seeing the most new product in the U.S. right now, with about 6% of total stock coming in as new supply, Campo said.

“Merchant builders tend to be herd animals, and they build in the same places,” Oden said. “So a lot of the product that’s going to be coming in 2024 is in the same submarkets as 2023.”

Mid-America Apartment Communities also felt the impact of new supply in the third quarter, which manifested itself in lower new lease pricing, particularly in August and September, Chief Strategy and Analysis Officer Tim Argo said on Oct. 26. The pressure was driven by higher concessions in many markets, he said.

The high volume of new deliveries in several markets will continue to weigh on rent growth for the next few quarters but should dissipate thereafter, MAA CEO Eric Bolton said.

“The environment we find ourselves in right now is likely to sort of continue for a while — I'm guessing through Q2 of next year,” he said. “By the time we get to Q3 of next year, comparing against this year, we think that things will start to feel a lot more comfortable.”