Executives at Memphis-based REIT MAA were expecting to compete with a healthy dose of new supply in their Sun Belt markets in the second half of 2023. What they weren’t anticipating in the third quarter was how desperate merchant developers would be to fill those new apartments in markets like Austin, Texas, and Tampa, Florida.

“We're not surprised by the competition from new supply,” MAA CEO Eric Bolton said on the REIT’s third-quarter earnings call last week. “What we're surprised by is how aggressive some of the merchant developers have gotten in an effort to expedite their lease-ups.”

The REIT saw developers get aggressive by offering bigger concessions in August and September as the 10-year Treasury began moving toward 5%. With higher interest rates putting pressure on their loans and their ability to refinance, there is added motivation for those builders to get to 90% occupancy by the end of the year, according to MAA Chief Investment Officer Brad Hill.

“Some of the merchant-built product is in a rush to get stabilized as quickly as possible, preferably before we even get into the holiday season, which is why I think there were a lot of noticeable shifts that took place in August and September,” Bolton said. 

The effects of this heightened supply were themes throughout MAA’s earnings release and conference call. Here are three takeaways.

Demand persists

As developers got more aggressive with concessions, MAA said its new lease pricing deteriorated, dropping 4% to 5% year over year. But it is still booking renewal rate growth in the 5% YOY range as current residents are accepting price hikes. “We continue to get solid performance on our renewal practices,” Bolton said.

In Q3, MAA saw half of the move-outs due to rent increases that it did in 2022. Overall resident turnover was down 4% YOY in Q3 as interest rates for a 30-year mortgage rose to almost 8% in the quarter. “What's really at play here on the turnover is just people aren’t buying houses,” Bolton said.

Other factors that support demand, such as strong employment markets, low turnover, solid collections, wage growth and net positive migration trends are continuing, putting MAA in a good position when new deliveries fall in 2024, according to Bolton.

“We think that as we get into the back half of next year, we probably do start to see supply levels start to moderate and some of the developer pressure start to moderate,” Bolton said. “We probably do start to see market rent growth turn positive on the new lease pricing.”

Buying opportunities

Desperate developers offering concessions may be a short-term headache in some MAA markets, but they could produce a long-term opportunity. 

Case in point: In October, the REIT purchased a newly built 323-unit mid-rise in Phoenix now called MAA Central Avenue for approximately $102 million. The property is in lease-up and the developer was under pressure to close on a sale by a certain date, according to Hill. 

“With the property nearing stabilization, we expect over the following year or so to capture further margin and yield expansion opportunities as a result of adopting MAA’s more sophisticated revenue management practices and technology platform coupled with our future ability to achieve operational synergies with another MAA property that is only half a mile away,” Hill said.

MAA’s transaction team will continue to look for new properties and land for future developments across its footprint as merchant developers seek exit strategies. 

“Al [Campbell, CFO] and Clay [Holder, chief accounting officer] have our balance sheet in a great position to be able to take advantage of additional compelling opportunities as they continue to materialize later this year and into 2024,” Hill said.

Construction pipeline growing

As other apartment developers deal with their legacy pipelines and loan issues, MAA plans to continue building. In Q3, it funded over $47 million of development costs toward the completion of its current $643 million pipeline, leaving $296 million remaining to be funded on this pipeline. 

In the next six months alone, MAA plans to start three projects, according to Hill. It has five other developments, representing 1,320 units, that could be ready for construction by the end of 2024.

“Today we own or control 13 well-located sites, representing a growth opportunity of nearly 3,700 units,” Hill said. “We have optionality on when we start these projects, allowing us to maintain our patience and discipline when making capital deployment decisions.”

While supply may be an issue in some of MAA's markets, there is an opportunity for developers who can get projects out of the ground in the near future. 

“Any project we start in 2024 will deliver units into a stronger leasing environment with lower competitive supply in late 2025 and 2026,” Hill said.

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Proptech firm MRI Software recently released a report with a finding that is probably no surprise for apartment operators.

In analyzing over 1 million market-rate units from January through the end of August, the Solon, Ohio-based company found that the market is “reverting to pre-pandemic patterns and becoming more predictable.” After a couple of years of turbulence, 2023 is shaping up to be a lot like 2019, when leasing was strong in the spring and summer but slowed in cooler months. 

Cindy Clare, chief operating officer for Greensboro, North Carolina-based owner and manager Bell Partners, is seeing similar patterns in her portfolio. “We’re back to a more normal cycle than what we've been in in the last few years,” she told Multifamily Dive. “So, seasonality is playing a role.”

But a return this year to slower leasing in the fall and winter isn’t the only thing challenging apartment operators as the year comes to an end. A jump in supply is also becoming an issue in many metros around the country, with apartment completions in Q3 hitting the highest level since the 1980s, according to RealPage. 

In cities that are expecting a lot of new deliveries, like Austin, managers will be facing even more pressure. “In some places, you are going to be fighting for every single new tenant you can get, especially at the top end of the market,” said CoStar's National Director of Multifamily Analytics Jay Lybik.

To maintain occupancy in the face of these pressures, managers are turning to expiration management and, if needed, concessions.

Pressures on demand

Before COVID-19 upended regular patterns in 2020, spring and summer were the busiest times for apartment operators. More prospects sought new apartments during this time frame, touring properties and signing leases. Then, around late September or early October, traffic usually began to slow. 

Though it may have picked up briefly later in November until Christmas, operators were primarily focused on maintaining occupancy and renewals when fall arrived. 

This year, operators are dealing with the added pressure of more competition from new units just as demand cools.

“There is a lot of new construction finally catching up to or exceeding demand,” said Diane Batayeh, CEO of Southfield, Michigan-based apartment manager Village Green.

New apartment openings don’t pause just because the weather gets cold and fewer people are shopping for apartments.

“Things are coming online in the fourth quarter,” said Allyson McKay, managing director and executive vice president of management services at San Antonio-based developer and manager Embrey Partners. “We all hope and pray that things come online during the summer when people are looking. But when they come online during that fourth quarter, it makes it even more difficult.”

While rents have slowed, they haven’t gone negative yet, except in certain areas. “The only market we've seen go negative is Minneapolis, where there was such an oversaturation of new products,” Batayeh said.

Closing the back door

As seasonality returns to the market and supply picks up, occupancy will be a bigger focus this winter. “While we still look for some rent growth and we certainly do renewal increases and all of those things, we also push our occupancies,” Clare said.

Lease expiration management, where companies like Embrey look to reduce the amount of leases expiring at the same time, is an important tool to maintain occupancies, according to McKay. “We’re just ensuring that we've got that back door closed,” she said.

Village Green works to keep residents in place by getting three to five months ahead on renewals. 

“We're offering either no increases on lease trade-out rates or minimal increases on lease trade-outs,” Batayeh said. “So we’re really trying to stem the tide.”

Lowering rent is also an option, but it’s one that operators would like to avoid. “You don't want to dump your rents because you have those residents that are living there,” McKay said. “So it's just finding that right path to keep you on track through the slow season.”

As it negotiates with residents, Village Green is also trying to push more of its lease expirations to the warmer months, when it can more easily fill units and get rent increases. “In the past, we might not have offered that much flexibility on renewal,” Batayeh said. 

Concessions creep back in

In the third quarter, national apartment completions for the year reached 405,000 units, according to RealPage. But that is only the start. Another 656,000 units are scheduled to be delivered next year. As this supply hits, managers will offer incentives faster than they normally would to maintain occupancy. 

Generally, Bell wants to have its properties between 94% and 96% occupied. “If we’re starting to see traffic slowing down and occupancies are not quite where we want them to be, then we’re going to make adjustments to get the occupancy,” Clare said.

To combat vacancies, managers may have to pull a lever they like to avoid — offering free rent for a certain period of time or some other incentive to residents to sign a lease.

“We are starting to see, in some markets, concessions creep back in,” Clare said. “You may not be lowering your rents, but you’re now offering a small concession to get people to move in so that you can get your occupancies up where you want them.”

Village Green will also go to incentives in areas with high levels of new competition. “In those markets, it's up-front concessions where it doesn't really impact your rent roll because valuations are still very important,” Batayeh said.

Concessions may be here for awhile

While concessions may be back, the days of multi-month free rental offers common in 2008 and 2009 haven’t returned, according to some observers. “We are seeing one month for new lease ups to selective [smaller] concessions for existing assets that have run into problems,” said Jeff Adler, a vice president at Yardi Matrix.

Jay Parsons, senior vice president and chief economist at RealPage, has seen bigger concessions. 

“The concessions are really concentrated in lease ups and those can be two or three months in some cases, but we are not seeing nearly as many stabilized concessions in the cycle as we did in the Great Financial Crisis,” he said.

Eventually, the weather will warm up next spring and traffic should pick up again, but new deliveries won’t be going away, meaning concessions might be here to stay for a while.

“I expect that in 2024, we’ll probably see a little more of that as the supply delivers,” Clare said.

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By Apartment List

The rental market has been on a rollercoaster in recent years, with abrupt swings in demand and supply, changing preferences, and shifts in the geography of where renters choose to call home. As we head into 2024, the question on everyone's mind is - where is this wild ride headed next? Here are the key trends that the Apartment List Economics team expects to see in the coming year.

#1 - 2024 will bring the most new apartments in decades

The number of new multifamily apartment units under construction hit one million for the first time ever in 2023. Although that figure has recently begun to dip, there are still a near-record number of units in the pipeline, many of which will reach completion in 2024. In fact, new apartment completions are currently on the rise and are expected to peak next year. It’s almost certain that 2024 will be the strongest year for new multifamily supply since the 1980s. 

That said, the supply surge won’t be indefinite. Developers are already responding to the higher interest rate environment that we’re in now. The number of new building permits being issued has already been falling for over a year and construction starts are following suit. Because of the lengthy development cycle of multifamily projects, this slowdown won’t be reflected in apartment completions until 2025. In 2024, multifamily operators should brace for swelling competition from all the new inventory, likely leading to occupancy rates softening further.

#2 – Low single-digit rent growth in 2024

After spiking in 2021 through the first half of 2022, apartment demand has since softened significantly. As weakening demand collided with increasing supply, year-over-year rent growth nationally plummeted from a peak of 18 percent in late 2021, to its current level of negative 1 percent, where it’s been hovering for the past four months. 

Looking ahead to 2024, we expect demand to bounce back slightly but remain on the soft side. The labor market remains fairly strong and there is likely some pent-up demand for new household formation. However, affordability continues to be a major concern and sentiment data shows that fears of a possible recession are still driving cautious spending behavior. Even in the most bullish scenario, it’s unlikely that demand will be strong enough to fully absorb all of the new supply that we know is coming. We expect that rent growth will rise out of negative territory early next year, but that it won’t get above the low single digits in 2024.

#3 – The changing rent vs. buy math will create more long-term renters

Even though we don’t expect to see a boom in multifamily demand next year, one factor that will continue to act as a tailwind to rental demand is the ongoing deadlock on the for-sale side of the housing market. The combination of record-high prices and spiking mortgage rates has caused existing home sales to grind to a standstill. Few prospective buyers can afford to buy in today’s market, and current owners who are locked into low mortgage rates don’t want to sell.

Even those who can afford to buy in today’s market may find that renting now actually makes more financial sense. Although most Americans still aspire to own homes, more are now finding themselves renting later in life, and that trend is likely to continue. Consensus expectations are that mortgage rates will ease modestly next year, but likely not enough to significantly alter the prevailing dynamics of the for-sale market. Multifamily operators should consider what they can do to better appeal to the growing class of long-term renters.

#4 – Hybrid work will cement itself as the new norm for office jobs

In 2023, the remote work narrative focussed on return-to-office plans, but this focus obscures the fact the pendulum will never swing fully back to the pre-pandemic norm. According to the latest estimates, 28 percent of all work days are still from home, and that figure appears to be stabilizing at that level. 42 percent of American workers currently have some form of remote work flexibility, and hybrid arrangements are much more common than fully remote ones.

Hybrid workers present an opportunity for operators to meet new needs of high-earning and highly mobile renters. With many homes continuing to serve double duty as workplaces, renters will have an increasing demand for spare bedrooms and shared workspaces within multifamily communities. Communities that lie further from major job centers may also see growing demand, as renters are willing to bear longer commutes when those commutes are occurring less frequently.

#5 – More renters will use AI in their searches

2023 will likely be remembered as the year when AI went mainstream, with ChatGPT and related technologies making ubiquitous headlines. In the multifamily space, the chief applications of AI tools to date have involved helping operators manage communications with renters. While these technologies will continue to develop, we expect 2024 to bring a new wave of AI-powered tools targeting renters directly. It will soon become commonplace for renters to use AI in their apartment searches, and multifamily operators must stay on the cutting edge of these advances. Speed will be critical, as renters will expect up-to-date information that new tools can parse and organize quickly.

2024 is certain to bring twists and turns no model can predict, as the new year always does. But we hope that by forewarning of what’s foreseeable—from new supply waves to persistent homeownership headwinds bolstering rental demand—we can help you prepare for what is ahead.

Dive Brief:

• The Federal Trade Commission has announced a new proposed rule to prohibit businesses from charging “junk fees,” which it defines as hidden or bogus fees that are not disclosed to consumers before they begin a purchase.
• The rule would require businesses, including multifamily providers, to disclose all fees in a transaction when quoting or advertising a price. This, according to the commission, would ensure customers know exactly how much they are paying, what they are paying for and whether they can get a lower price elsewhere.
• The FTC would be able to seek monetary penalties against businesses that do not comply with the rule and secure refunds for customers.

Dive Insight:

In response to the announcement, National Apartment Association CEO Bob Pinnegar said that the organization supports transparency and dialogue between multifamily providers and residents, but is not in favor of added regulations, which he said can limit the availability of affordable housing.

“Rental housing fees are disclosed in the lease and during the application and leasing process. It is incumbent on both parties to ensure they can uphold the terms of their contractual agreement,” Pinnegar said in a statement provided to Multifamily Dive.

Once a notice for comment on the new rule is published in the Federal Register, consumers will be able to submit feedback in writing or electronically for 60 days. 

California recently banned junk fees at the state level with legislation set to take effect on July 1, 2024. The effort to ban junk fees nationwide is one of a number of recent Biden administration actions that could impact the multifamily housing sector; others include gathering information on certain housing practices, such as tenant screening processes and rent increases, and the creation of a blueprint for a Renters’ Bill of Rights.

Earlier this year, Marcia L. Fudge, secretary of HUD, released an open letter urging housing providers and local governments to “adopt policies that promote fairness and transparency of fees faced by renters.” Her recommendations included:

• Eliminating or limiting application fees.
• Allowing a single fee to cover multiple applications on the same platform, or to cover applications at multiple properties owned or managed by the same provider.
• Eliminating duplicative, excessive and undisclosed fees, including administrative or processing fees.
• Identifying bottom-line costs for tenants in advertising, including move-in costs, monthly rent and fees.

At the time, Nicole Upano, assistant vice president of housing policy and regulatory affairs at NAA, defended the presence of fees during the renting process. "Rental application fees are a necessary part of doing business, helping cover the costs associated with responsible screening,” Upano said. “It is paramount that housing providers retain the ability to screen prospective residents and ensure the long-term viability of rental communities.”

A trio of developers has capped off the first residential section of the Circle Square master plan with the opening of Artisan, a 24-story, 298-unit apartment property in Cleveland’s University Circle neighborhood. 

Circle Square, under development by Chicago-based White Oak Realty, Cleveland-based Ponsky Capital Partners and Cleveland-based Midwest Development Partners, has been in the planning stages for several years. The master plan is set to add retail, office, parking and residential uses near Case Western University and the Cleveland Clinic medical center in future phases.

Designed by Chicago architecture firm FitzGerald, the Artisan building is situated to take advantage of views of the surrounding area, including downtown Cleveland, Lake Erie and Wade Lagoon. It also serves as the anchor point around which the infrastructure for the master plan would be built, according to Mike De Rouin, president of FitzGerald. This included modifying a right-turn lane on Chester Avenue, one of the cross streets, to create a larger sidewalk and streetscape at the base of the building.

“The site we did first is key to helping them re-start the rebuilding of that intersection [at Stokes Boulevard and Chester Avenue],” De Rouin told Multifamily Dive. “The city of Cleveland is trying to improve the functionality of the streets in that location. That creates a development opportunity, because there's some roadway that can be converted back to usable land rather than six lanes with no one driving on it.”

The structure is divided into three sections, each stacked on top of the other — a ground-floor retail center, a parking garage clad in variegated metal panels and a glass-and-steel residential tower on top, capped with a rooftop amenity lounge. The developer is currently looking for a grocery anchor to fill out the bottom level, according to De Rouin.

Health and wellness

Artisan has received the Green Building Initiative’s Green Globes for New Construction-Multifamily certification at a Two Globes Level and is currently pursuing Fitwel certification for its wellness features. These include blackout shading in sleeping areas, acoustic sound controls and high-grade air filtration systems, as well as a no-smoking policy that is reinforced in each lease. 

“That's become something that we are seeing more and more proactively from apartment owners and developers,” De Rouin said. “One of the easiest things they can do to make their buildings more healthy is keep them smoke free.” 

The neighborhood is also an enormous contributor to the building’s wellness potential, according to De Rouin, with a strong Walk Score and easy access to green spaces and public transit. To take advantage of this, Artisan residents have access to a gear room off the elevator lobby, through which they can rent bikes or scooters in order to explore the city or sports equipment to use in parks. 

“It’s glass-fronted; it actually looks like a retail spot that entices people to engage with it,” said Kristen Larkin, principal and interior design director at FitzGerald. “Things are nicely displayed and even branded with the name of the property.”

The building operates with 23% fewer emissions than a comparable Energy Star median performance building, according to information provided by FitzGerald, and features low-impact mechanical systems, high-performance glazing and a green roof. Apartments range from studios to three-bedroom units, each with floor-to-ceiling windows, stainless steel appliances, walk-in closets and in-unit laundry. Lake views, office space and private balconies or terraces are available in some apartments.

Cultural opportunities

Given the building’s location near Case Western University, the Cleveland Clinic and a variety of museums and cultural destinations, the architect and developers wanted to engage with the community’s educational context. “We see the neighborhood as akin to a Midwestern Smithsonian environment,” Larkin said, “where you’ve got all these major museums and campuses literally at the foot of the building.”

Along with a lounge and pool deck, the rooftop includes an assembly area designed as a space to host cultural and social events for Artisan residents, including artists and lecturers.

“[The developer was] trying to create an environment that encouraged people to study and to learn from each other,” Larkin said. “The thought there is that [Artisan’s tenants] are the type of tenant that would appreciate that, and encourage it and facilitate it.”

Other amenities include a media room, a dedicated coworking and library area, a gym and yoga studio, full-service coffee in the lobby, a golf simulator, bike storage and a dog park and dog wash station.

For Highlands Ranch, Colorado-based REIT UDR, the beginning of the third quarter brought expectations that the advantageous supply-demand situation the apartment industry had been enjoying for a few years would continue.

Then things changed as developers of new properties in its markets began cutting prices. “Since mid-September, increased concessionary activity from new supply deliveries and lease-ups have put more pressure on our lease growth rate and occupancy across A- and B-quality communities throughout our portfolio,” said UDR’s CEO Tom Toomey on the REIT’s recent third-quarter conference call. “This dynamic and its impact on our B-quality communities, in particular, was unexpected and unprecedented in my 30 years in the multifamily industry.”

Supply was a constant theme on UDR’s earnings call. Here are three other highlights from its Q3 release and call:

Discounts galore

Even with the concessionary pressures and reduced guidance, 2023 is still shaping up to be a solid year overall for UDR. The company’s occupancy rate is stable, holding at 96.7% year over year, and it is still posting renewal lease growth above 4%. 

However, the slowdown that began in mid-September brought weaker traffic, lower leasing volume and new lease rate growth that decelerated beyond typical seasonal norms. “We have seen a demand environment that continues to hold up well, but one that has been overtaken by growing concessionary pressures from elevated apartment deliveries as we entered the seasonally slower period of the year,” UDR Senior Vice President of Operations Mike Lacy said on the call.

Lacy suggested that consumers are “OK, right now,” but they suddenly have a lot of choices at discounted prices in UDR’s markets. “Buyers have become shoppers, which has pressured blended lease rate growth and occupancy across the industry,” he said.

The changes in the market forced UDR to reduce its same-store revenue and net operating income guidance ranges by 75 basis points each at the midpoint for 2023. In 2024, Lacy predicts rent growth will fall below the company’s long-term average of 3% due to elevated deliveries. 

“We expect this concession-heavy dynamic to continue throughout the fourth quarter and into 2024,” he said.

Regional dynamics

Though UDR is facing elevated supply in all of its regions, the coastal markets appear to be in better shape. New York City and Boston, which provide about 20% of the REIT’s NOI, are two of its strongest markets with average third-quarter occupancy at 96.7% and nearly 7% YOY same-store revenue growth, according to Lacy. “Minimal competitive new supply and high levels of demand continued to support pricing power with blended lease rate growth of nearly 4% during the quarter,” he said.

On the West Coast, occupancy sits in the mid-to-high 96% range. Orange County, California, which is UDR’s second biggest market, saw YOY occupancy jump 70 bps and NOI grow 7% during Q3. However, concessions are an issue in other markets in the region. “While we are currently averaging three weeks of rent concessions across our San Francisco portfolio, it is not uncommon to find four to six weeks of free rent in the market,” Lacy said.

As other REITs have reported, the Sun Belt is proving to be home to the most challenging markets. UDR’s new lease growth has fallen 3% to 6% in the market, which Lacy said equates to a three-week concession. Still, he said job growth and traffic volumes show that demand is solid and absorption is positive.

“However, because of the multitude of new options available to residents, renters have been willing to shop more,” Lacy said. “We expect Sun Belt supply deliveries will remain elevated in 2024, which should continue to constrain pricing power across the region.”

Operational focus

In an environment where the fundamentals are declining, UDR will lean on two initiatives to increase revenue, improve resident retention and expand its operating margin: building-wide Wi-Fi across its portfolio and improving customer service. “While we cannot control macro factors that impact our business, such as interest rates, inflation and job growth to name a few, we are focused on what we can control,” Toomey said. 

UDR is achieving incremental revenue of $50 per month per apartment home at a nearly 75% margin on its wireless initiative, according to Lacy. “We expect to end 2023 with community-wide Wi-Fi installed across roughly 20,000 units, with additional rollouts planned through 2025,” he said.

The REIT is also working on a customer experience project that should reduce turnover, according to Lacy. “We've spent the last two years analyzing nearly a decade's worth of leasing data and resident interactions across every possible touchpoint,” he said. “From this, we built real-time resident-specific experience dashboards and found that 50% of our turnover is controllable.”

UDR’s turnover has been above its apartment REIT peer group, but it is working to identify resident and property-specific problem areas. Lacy said every 100 bps of improved retention means $2.5 million of higher NOI. 

“Over the coming years, the tangible effects of our efforts should be evidenced by lower turnover, as well as higher occupancy, expense savings, increased other income and improved pricing power,” Lacy said.

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