That 2022’s multifamily party is over. Now rejoice.
2023 will reward apartment pros focused on the basics of good property management.
It couldn’t last forever.
2022 was the year the multifamily party finally came to an end. Just look at where rents are at the beginning of 2023.
After peaking in March 2022 at an annual growth rate of 15.7%, according to Real Page, asking rents slowed last year. December marked the fourth consecutive month of rent cuts, with new lease asking rents coming down 1.6% since September, a rate of decline going beyond normal seasonality.
Now, we’re in a new apartment rental market. That’s good news for multifamily pros who are ready to get back to work.
Aside from marking the end of unfettered rent growth, the cracks that appeared in the apartment market in 2022 underline why operators who practice good property management fundamentals will have a leg up on the competition in 2023.
It also means that less seasoned operators who have become accustomed to measuring their portfolios via rent growth instead of occupancy and net operating income are in for a reckoning.
Indeed, with the perfect storm of more apartments coming online brewing just as rents have peaked, operators will need to return to the basics while offering safe, well-maintained units at a competitive price to weather it.
A wave of supply
Consider that in 16 of the country’s biggest apartment markets, construction of apartments reached an all-time high in 2022.
Who will move into all those units is anybody’s guess since another metric that measures apartment leasing velocity—renter turnover—slowed to a crawl in 2022.
Some observers have already been picking up on the fact that faced with the uncertainty of a looming recession, inflation, and higher interest rates, the majority of renters are choosing to stay put or, when given the opportunity, double up with family and friends.
Experienced property managers already know this since they’ve seen vacancies—a critical historical metric used to measure the health of communities—double in the last year to hit 5% in December.
This is actually good news. Traditionally, a rate of around 95% occupancy means that you’ve priced your apartments right.
The fact that vacancies got so low as rents continued to climb signals that multifamily’s customer base—i.e., renters—also recognized how out of whack the apartment market was in 2022. Why move and pay a higher price?
These same renters will soon pick up on all those new apartments coming online—and their lower asking rents. The likely outcome is more concessions returning to the marketplace in 2023. Experienced operators will balance their rents and occupancy rates to keep those existing (i.e., now higher-paying) renters in place.
Long-term staff = long-term renters
Seasoned property pros also know keeping good renters in place comes down to keeping the staff you have. Knowing this will become increasingly important as the market turns in 2023.
During the grips of quiet quitting and the Great Resignation in 2022, we learned that apartment firms with higher staff turnover have lower resident retention rates.
According to talent performance solutions provider Grace Hill, every 3% reduction in staff turnover nets a 4% decrease in residents leaving. That means a 15% improvement in employee retention translates into a 20% boost in resident renewals. That’s a benchmark to aim for in 2023.
The dark side of rent growth
The end of 2022’s free-wheeling multifamily party also revealed the darker aspects of the institutionalization of the apartment industry.
Two nonprofit news agency ProPublica investigations highlighted the negative impacts of private equity investment in the industry and revenue management software to set ever higher rents.
The first investigation exposed the fact that, by buying and flipping apartment buildings, private equity investors lost sight of how to increase the value of a property fundamentally.
Instead of focusing on increasing NOI by creating value, maintaining properties, and improving amenities, in some instances, they simply increased rents while cutting back on maintenance.
The other investigation examined price-setting revenue management systems, where operators lost focus on staying competitive by physically shopping and knowing their competition. Instead, they simply raised rents according to what the algorithm recommended.
Both instances illustrate how doing the work and concentrating on the fundamentals of property management fell out of focus during the upside-down dynamics of 2022.
As the market course corrects in 2023, those property managers who get back to the basics will be the ones who thrive in this industry long after 2022’s multifamily party has faded to a distant—though perhaps painful—memory.