Intelligent Investment

Looming Multifamily Oversupply Likely Will Be Short-Lived

March 2, 2023 3 Minute Read

CBRE forecasts that delivery of a near-record 716,000 new multifamily housing units over the next two years will push the sector’s overall vacancy rate above equilibrium from 4.6% to a peak of 5.2% by year-end.

This may come as a surprise to some, since the U.S. currently has an overall housing shortage—nearly all of which is in single-family homes and not multifamily units. CBRE expects that demand for rental housing will gain momentum this year as vacancy peaks only slightly above its long-run average of 5.0%.

Figure 1: Housing Surplus/Shortage

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Source: CBRE Research, CBRE Econometric Advisors, U.S. Census Bureau, Q1 2023.

More than 750,000 multifamily units are currently under construction—the highest amount since the housing boom of the 1980s. Most of these new units are in markets that experienced the greatest in-migration during the COVID-19 pandemic. Although population growth in these markets is beginning to slow, the rapid increase in construction costs due to inflation and supply chain disruptions has caused multifamily starts to slow as well—meaning that the construction peak is likely occurring now.

This current wave of construction is expected to expand the nation’s total multifamily inventory by 4.2%. Although the multifamily market has recorded negative net absorption over the past three quarters, we expect demand will turn positive in the first half of this year and limit the extent to which rising vacancies could significantly slow rent growth. We forecast rent growth of 3.5% for the year, down from 6.7% in 2022 and 13.4% in 2021 but still relatively healthy when compared with the long-run average of 2.5%.

Figure 2: Annual Deliveries & Units Under Construction

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Source: CBRE Research, CBRE Econometric Advisors, Q1 2023.

As the market returns to equilibrium, the potential for construction delays and extended timelines due to ongoing labor shortages could limit the rise in vacancies. Early in the current construction cycle (2013) when the pipeline was approximately 300,000 units (less than half the amount today), the time of construction from start to finish averaged 16.5 months. Today, that timeline averages 20.5 months, nearly 25% longer. The biggest jump in that expanded timeline occurred in 2021, when units under construction surged.

Figure 3: Average Time to Complete Multifamily Construction Projects

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Source: CBRE Research, CBRE Econometric Advisors, Q1 2023.

Even with a surplus of multifamily units over the short-term, CBRE forecasts that an additional 2.3 million new units will be needed nationwide to maintain healthy market fundamentals over the next 10 years. Once the largest portion of the delivery wave has concluded in 2024, the nation will still need nearly 200,000 additional units annually to maintain proper supply and demand balance. While a development surplus this year may weigh on near-term market fundamentals, it ultimately will lay the foundation for a healthy market throughout the next cycle.

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