New multifamily deliveries will place upward pressure on vacancy during the near-term, while solid leasing demand will prevent a significant rise in overall rates in 2024.
Overall, the West Coast multifamily market performed consistently well over the past decade with low vacancy rates, expanding inventories, and rising lease rates. Additionally, investment activity has been relatively steady, with total sales volume surging in 2021 and 2022. However, while multifamily leasing remained solid in 2023, sales volume fell off a cliff and posted its lowest volume levels since 2013. While apartment inventories have grown substantially, giving tenants more options in 2023 and 2024, construction starts are expected to temper by the end of 2024, helping the balance between supply and demand hover near equilibrium.
Apartment sales declined dramatically in 2023
West Coast apartment sales declined in dramatic fashion in 2023, falling by 60% compared to 2022 and ending the year at $5.5 billion. Average pricing also declined by approximately 11%, year-over-year at $267,085 per unit in 2023 compared to $275,520 in 2022. While there were a handful of factors impacting these declines, chief among them were significant interest-rate increases in 2023, uncertainty in the financial markets, and a growing disconnect in pricing between buyers and sellers — all of which helped place downward pressure on the demand for multifamily properties. As a result, many investors searched for opportunities to purchase properties with assumable debt in an effort to mitigate risk from rising interest rates.
Multifamily Sale Volume Significantly Declined
Apartment vacancy remains healthy in most markets with balanced inventory
With supply and demand relatively balanced in most markets, the West Coast multifamily vacancy rate experienced a modest 100 basis point increase compared to pre-covid, rising from 5.5% to 6.5%. The forecast for 2024 calls for a slight increase to 6.9% by the end of the year. As expected, there continue to be market variations, with Phoenix having both the highest vacancy and the largest increase since covid. This was largely influenced by recent construction completions totaling more than 25,000 new units over the past two years, accounting for 20% of the total completions on the West Coast. In contrast, markets like Reno, Orange County, San Diego, and Silicon Valley experienced a drop in vacancy since 2019, illustrating the strong demand across many markets.
Multifamily Vacancy Rate by Market
Solid multifamily leasing performance is expected during the near term
While current development activity will place upward pressure on West Coast vacancies, solid and persistent levels of demand will prevent a significant rise in rates. The 2024 forecast shows a small uptick in vacancy rate to 6.9% by the end of 2024, while asking rents are expected to rise by 2.6% over the same period. The near-term weakness in the national and regional economies will pose some challenges, with the impact on the multifamily market expected to be minimal due to strong leasing fundamentals. The investment market is projected to rebound compared to the historically low levels in 2023 but will remain subdued compared to previous long-term averages in both volume and pricing.
West Coast Multifamily 3-Year Forecast