09/20/23 09:03 AM EDT

Rental Vacancy Spike Hints At Oversupply

Get free access Tier 1 Alpha's Market Situation Report & more this week ONLY during Free All Access Week.

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Today's bonus chart focuses on the availability of vacancies in rental properties. Due to the imbalance between supply and demand, the national vacancy rate for multifamily has climbed 200 basis points, from a historic low of 4.7% in Q3 2021 to 6.8 percent in 2023. Vacancy for combined single and multifamily bottomed out closer to 5.6% in Q2 of 2022 and has moved up 100 basis points. Such shifts in vacancy rates were also observed during the recessions in the 70s and 80s. The GFC had its distinct flavor, characterized primarily by individuals losing homes and subsequently seeking rental places.

While this topic is extensive enough for a book, we'll aim for brevity. Data from Fannie Mae suggests that urban submarkets have seen an average inventory spike of 8.9 percent. In contrast, despite recording the highest rent growth, suburban submarkets have experienced a minor average increase of 5.3 percent in multifamily units since 2020. This divergence suggests that while suburban rents have risen, the supply-demand dynamic remains comparatively stable.

Nationally, the rise in submarket vacancy rates showcases the waning demand for multifamily units, hinting at an impending oversupply. In Q1 2023, only 42,000 units were absorbed, a significant drop from the pre-pandemic five-year average of 82,000, while 109,000 new units entered the market. That is not good news, considering all the CRE paper to be rolled over in the next 24 months at much higher rates.

Given that the median US mortgage now stands at a record $2800 a month, inclusive of taxes and insurance, home ownership is becoming more of an ambitious dream. As homeownership rates dip and vacancy rates surge, it's evident that there's a growing preference for multigenerational homes. With tighter credit and stricter lending standards, even first-time homebuyers opt for multigenerational living to economize. The National Association of Realtors notes that 28% of first-time buyers are seeking larger homes that multiple incomes can afford, a statistic that drops to 18% for those purchasing their subsequent homes. The trend towards multigenerational living, alongside rising rental vacancies, reflects our current era. The NAR published no data on divorce rates after living with the in-laws, we think realized Vol north of 70 on that one.