Real Estate Update: Multifamily Market Overview

The multifamily rental market remained strong through the first months of 2022. The tight labor market and resulting increase in wages also continue to boost apartment demand even as economic and geopolitical headwinds strengthened.

The apartment sector persisted in outperforming expectations as new tenant demand drove up occupancy. Existing renter households renewed at a high rate after two years of support from stimulus funds and pandemic-related eviction protections.

The surge in house prices, as well as the more recent increase in mortgage rates, is expected to keep homeownership beyond the reach of many households as the costs of ownership rise faster than incomes. Explore economic trends below and how they could impact your business or investments.

Demographic Effect on Multifamily Real Estate

Positive demographic trends combined with strengthened economic performance support elevated apartment demand.

With nearly 67 million people aged 20–34 in the United States, the pool of prime renter age individuals is larger than ever. Additionally, roughly 4.3 million people will turn 18 each year from 2022 through 2030. The unbundling of households coming out of the pandemic also contributed to the rapid acceleration of housing demand.

Rosen Consulting Group estimates that roughly 1.9 million net households formed in 2021, in part a result of reversing a portion of the pandemic-related trend of household consolidation, producing a record level of apartment absorption. This is the most households created in one year since the 1980s.

Generation Z Enters the Rental Market

With many individuals working from home at least part of the workweek, roommate arrangements became less desirable, and the number of single person households rose in large metropolitan areas.

While some millennial households transitioned to ownership, Generation Z backfilled apartment units, particularly in urban neighborhoods.

These younger workers leveraged the tight labor market into higher incomes, allowing for more single living situations. They also benefited from student loan repayment moratoriums.

Within the investment-grade apartment segment, the average renter income increased by 10% to 20% in many cities, highlighting the better financial start Generation Z has relative to millennials.

Adults 18–34 Living at Home
Bar graph showing Adults 18 - 34 living at home from 1985 to 2021 against the long-term average

National Outlook and Market Variations

The growth in rent with at high occupancy levels isn’t a local market phenomenon and persisted nationwide. Through the first quarter, national rent growth reached 15% compared to 2021.

Aside from a few demographically challenged cities in the Rust Belt and mid-Atlantic regions, asking rents increased at a faster pace than the historical average.

Furthermore, annual rent growth in the double-digits was the norm rather than indicative of a handful of outperforming metropolitan area as nearly all the 20 largest metropolitan areas in the country produced rent growth greater than 10%.

Multifamily Housing Starts
Bar graph showing the number of multifamily housing starts from 2000 to 2021 against the long-term average

Housing Shortage Trends

The surge in rental demand—as well as diminished concerns about tenant defaults creating vacancies—continued to spur new construction activity.

Housing shortages exists in nearly all cities, but is most evident in large, coastal urban centers and, more recently, secondary, and tertiary growth markets where migration trends accelerated during the last few years.

Construction and Development Boom

Readily available capital and investor appetite for apartments led to a development boom outpacing any period since the 1980s. Rental construction starts increased to 445,000 units in 2021, nearly double the annual average output of the last 20 years.

Despite this apartment construction boom pent-up demand for housing caused by the construction shortfall quickly absorbed new deliveries. The national housing shortage is so severe that it will likely take many years of production to make up for the 3.8 million unit (for sale and rental housing) cumulative deficit created by underbuilding from 2010 to 2021.

In addition to this shortfall, roughly six million more adults than the historical average aged 18–34 now live with family. Spurring just some of these individuals to form their own households could exacerbate the supply shortfall.

While development activity accelerated, the range of supply responses led to variation in market performance. In regions where development hurdles are few and labor costs remain relatively low, apartment deliveries accounted for a larger share of existing inventory.

Housing Production versus Household Formation
Bar graph showing number of total completions against number of household formations from 2001 to 2021

Readily available capital and investor appetite for apartments led to a development boom outpacing any period since the 1980s.

Trends in the Sunbelt

The combination of strong migration and rapid economic recovery in the last year led to tight market conditions in the Sunbelt.

Occupancy levels climbed, in some cases reaching record highs, while annual rent growth accelerated into double-digit territory and surpassed 20% in several markets. This surge in demand helped fuel a development boom, and construction pipelines are at or near levels unseen in decades.

This rapid supply response began to outpace demand slightly, a sign of developer optimism more than a decline in renter demand. Occupancy levels ticked down in Sunbelt cities where development hurdles are relatively low, including Phoenix and Las Vegas. The increase in available units, particularly amenity-loaded apartments, led to a slowing of rent growth trends.

California Trends

In California, particularly coastal metropolitan areas where development activity is more constrained, supply has yet to catch up to demand.

With a strengthening recovery from pandemic-related business restrictions and return of migration into urban centers, occupancy generally trended higher. The strong demand pushed rents higher, with tech-focused neighborhoods in the Bay Area outpacing rent growth of many suburban submarkets. Asking rent growth also accelerated in San Francisco and Silicon Valley after lagging the country thus far during the recovery period.

Notably, rent growth of luxury units, reflecting renters-by-choice, and multi-bedroom units led the market. Overall, the average asking rent nearly recovered to pre-pandemic levels in the Bay Area, though in-place rents remain lower in many communities.

Capital Markets Effect on Multifamily Housing

The Federal Reserve will likely play catch-up for not having normalized rates early by aggressively raising rates at each of its meetings in 2022. With the capital markets pricing in continued increases to the federal funds rate, expectations of potential real estate returns will likely adjust as well.

Though the cost of debt may increase further, complicating apartment acquisitions and refinancing activity, the primary risk of the Fed’s rapid tightening will be whether it can avoid a hard landing recession.

If the Federal Reserve, despite its track record, manages to tame inflation without causing more than a modest and short-lived recession, the multifamily segment would remain one of the stronger commercial real estate sectors.

Renter demand would be bolstered by higher mortgage rates with the decline in single family affordability leading to households renting for longer. Additionally, a rise in construction materials and financing costs may curtail development activity, supplementing the shortage of housing that persists throughout much of the country.

Apartment Cap Rates

Further cap rate compression is unlikely with cap rates for apartments in the 3% to 4% range, depending upon location and asset quality and while the 10-year Treasury yield approaches 3%.

If cap rates rise, assets need to produce strong rent growth for returns to remain positive.

Should cap rates normalize in the 5%–6% range, roughly a 100–200 base point increase from current levels yet still lower than long-term averages, renters would be unable to bear the level of rent growth needed, and investors would fall short of return targets.


The demand for higher quality housing is likely to remain elevated, particularly in coastal cities and growing secondary markets. Rental demand is relatively more resilient than other real estate sectors, as housing demand is somewhat inelastic.

Additionally, the ability of government sponsored enterprises to provide the apartment market with affordable capital options during all cycles leads to greater stability of asset values. The surge in apartment rents may slow in the coming months from the record levels, but continued job and wage gains should support rent growth higher than the long-term average.

Though pricing may be in flux, debt capital should remain available, with the Federal Home Mortgage Corporation projecting a 5%–10% increase in purchase originations in 2022.

Apartment market fundamentals will likely remain strong, and comparatively the sector has greater demand characteristics over the long term than other real estate sectors, but the realities of elevated inflation and higher interest rates shouldn’t be underestimated.

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To learn more about how the economic landscape could impact your real estate business or investments, contact your Moss Adams professional.

You can also find more insights at our Real Estate Practice.

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