Multifamily Concessions Are Up While Renewals Fall
New lease trade-outs plummet nationally.
A new report from Berkadia shows how concerns about slowing apartment demand and falling apartment rental rate growth is manifesting in current concession and lease renewal dynamics.
Owners and operators had accommodated renters because of pandemic economic pressures, peaking at 6.3% in Q3 of 2021. But even as they fell, they remained higher than normal. By the end of 2022, they were still at 4.5%, significantly higher than the pre-pandemic five-year average of 3.4%. That leaves open a question of whether this is a wave that will settle into older patterns or in part a reaction to the swift rise of rents and which has become a mechanism that lets them seem higher than they actually are.
There has been considerable variation by geography. “Regionally, markets in the Northeast were offering more concessions compared to others, peaking at 7.6% in 2021,” the report said. “Meanwhile, concessions in the South remained the lowest due to positive net in-migrations to southern markets such as Dallas-Fort Worth and Austin.” Although the exact numbers don’t appear, a graph in the report shows a level that looks about 5.5% as the peak in the South and that fell to about 5% or possibly a bit below.
“With concessions high trying to draw back in renters after the drop off in 2020, the national apartment renewal conversion peaked at 57.8% in the third quarter of 2021, the highest recorded in a decade,” the firm wrote. “There are multiple factors as to why more renters were renewing their leases in 2021. For example, government mandates and restrictions related to the pandemic caused more renters to stay in place.”
Another factor has been escalating home prices that put purchases out of the reach of many. Those people and households then had to look to apartment rentals. Even Class A accommodations looked more reasonably priced than owning a home.
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But that dynamic too has begun to slow. The 57.8% high in renewals dropped to 52.6% by 2022’s end. And then, with lower lease renewals and increasing vacancy days, both renewal and new lease trade-out rates dropped. Renewal trade-outs had climbed to more than 10% in the third quarter of 2022 and then began receding in Q4.
The biggest change came in new lease trade-outs, which had risen to about 18% in the second quarter of 2022. But enough pressure came off where maintaining such increases became impossible. By Q4, the now precipitous drop landed them at 5.8%, which was below renewal trade-outs.
However, Berkadia sees reason not to panic. “Given the economic backdrop of a possible recession, the number of units coming online, and increasing vacancy days, markets with strong renewal rates will be able to withstand any unforeseen challenges that lie ahead,” they wrote.