Underlying Apartment Demand Remains Robust

We looked at lease application data over the summer, but I thought it was worth revisiting this data as we see the market shift to see if there are any early indications of weakness. Much like the delinquency analysis we shared last week, there hasn’t been a significant falloff yet. Earlier in the summer, applications were down about 25% over a year ago, but in September, were only down 15%, indicating the market has held up better recently than it had earlier in the year.  

But two factors are reducing the availability of units: occupancies are still hovering around 10-year high and renewal rates are well above the average, especially within our portfolio where they’re averaging north of 60% compared to a low-50s 10-year average.  

With fewer units available to rent, it’s not surprising that applications are down. As we discussed over the summer, a better metric to examine incorporates the current occupancy of properties by looking at the number of applications per available unit.  

In this graph, the higher the number, the more applications there are per available unit. As we see on the chart, through most of this year, there are more applications relative to available units than last year. While these applications may be the result of tenants looking around to see what their options are, the fact is that the underlying demand for multifamily hasn’t dissipated as much as the media has portrayed.  

What does this mean for the market? 

With general economic uncertainty, it’s abundantly clear that most people have opted to stay in place. After all, it’s generally cheaper to do so – whether that’s because homeowners are locked in with low mortgage rates, or renters are renewing at below-market rents. As the market’s volatility evens out and inflation cools (depending on the economic damage done to get to that point), we should see multifamily absorption pick up as renters, who continue to apply to units, pull the trigger on forming new households.