The Commercial Real Estate Alpha Site

I’ve been noticing the concessions in ads and marketing for almost all apartments and single family rental communities. Yesterday in fact I drove by a newer apartment complex in Sarasota and saw a ‘two months free’ banner and passing another complex (not new but nice) they had a $500 move-in offer which is down from the initial $2,500 request.

Another well researched and riveting article from Jay Parsons!

Newly built apartments in lease-up signed just 10.7 leases per month, on average, over the past year. That’s the slowest initial lease-up pace in recent memory — and wayyy down from the peak of 18 leases per month set in early 2022.

What’s going on?

1) Is it a lack of demand at a macro level? Are lease-ups so expensive that there isn’t sufficient demand at those prices?

That doesn’t appear to be the case. AGGREGATE lease-up demand remains robust. And among all U.S. apartments, net absorption in the first half of 2023 was the second-best for any calendar year in 2+ decades.

2) There’s a lot of demand, but even more supply.

There were more than 605,000 units in initial leasing stages as of June 2024, which is MORE THAN DOUBLE the cycle low point of early 2022.

So it’s no surprise that per-property leasing velocity peaked when supply levels bottomed, and that per-property leasing velocity is now bottoming as supply peaks.

3) Implication? Slower lease-up process.

Typically, developers want to complete the initial lease-up and achieve stabilized occupancy within the first leasing cycle (~12 months). If you don’t, it means you’ll be renewing leases at the same time you’re still trying to fill up new units coming online. That, in turn, makes it very difficult to burn off lease-up concessions (i.e. “2 months free”) or increase effective rents to match initial underwriting.

Renters renewing their leases will be reluctant to pay more when there’s still a big sign on the property advertising 2-3 months free, and perhaps even lower asking rents, too, advertised on the property website.

PLUS these same renters could be enticed by generous concessions and/or lower rents at other newly built apartments nearby.

4) Another implication? It takes longer to achieve stabilization and refinance/sell.

Contrary to social media theories, developers are highly incentivized to lease units as fast as reasonably possible. Most rely on pricey short-term construction loans, and cannot refinance to (less pricey) permanent loans until they fill up and achieve stabilization. And for merchant builders, stabilization is often a trigger point at which to sell the property and return capital to investors.

Slower leasing mean this process will take longer, and it impacts developers via less revenue (lower occupancy + usually lower rents) + sustained higher debt costs + further delayed future projects.

5) Lease-up rents are falling.

For all these reasons, developers are not only offering generous concessions, but reducing the base asking rent, as well. Lease-up rents are falling even as rents on existing apartments hold flat — compressing the premium to rent a brand new apartment.

More on that another day. Stay tuned.

(The silver lining: New starts are plummeting below pre-COVID norms, so this is likely a short-term headwind, yet still a very real one for now.)

#apartments #multifamily #housing #DPCRE