As we take a sharp turn in 2023, it is important to reflect on the past year, take stock of where we are currently, and begin to look ahead. In terms of real estate, many sectors are still on the sluggish road to recovery approaching the three-year anniversary of COVID. However, one sector above the rest seemed to not only survive this storm but thrive. Unprecedented rent growth, all-time low vacancy rates, strong demand, and new development in the multifamily sector has been the norm not only for Hampton Roads but the entire nation.
This unparalleled progress has spurned investors to throw their hat in the multifamily ring and take advantage. However, the biggest risk to the apartment market may very well be complacency, as many areas are flooded with new supply and are at risk of oversaturation, if they aren’t already.
But is this true for our local market here in Hampton Roads?
National Overview: Oversupply in America’s Largest Markets
Multifamily developers built roughly 400,000 new apartment units in 2022 with seemingly no plans to slow down in 2023 as nearly 500,000 units are expected to be delivered in 2023. Given this new supply, national apartment vacancy has ticked up to 6% this year and rent growth fell from 11.3% in Q1 2022 to just 3.8% by the end of 2022 (CRE Daily).
In the larger metro markets such as New York, Dallas Fort Worth, and Austin, it appears that developers overestimated rental demand and are at risk of building more units than the market can bear. On another sobering note, an estimated 80% of new supply in 2023 with be 4- and 5-star luxury apartments, which rent on average for $600 more per month than middle-tier markets (CRE Daily). With rising inflation, these luxury developers will likely find that the pool of renters they expect can afford these apartments may not actually be a pool at all but a puddle. All things considered: larger metro markets are likely in for a rude awakening in 2023. However, smaller metros such as Hampton Roads appear to be in a much stronger position.
How Does the Hampton Roads Multifamily Market Compare?
Last year proved to be a softening year for multifamily demand in Hampton Roads, as compared to the seemingly unprecedented rent growth through 2021. This softening is evidenced by a rise in vacancy rates and a tapering of rent growth. The market is still in healthy shape however, boasting a 6.4% vacancy rate, which is still below each quarter from 2005-2018. (Rates reached an all-time low in mid-2021 at 3.2%) (CoStar). Regardless of this rise in vacancy, developers seem confident that demand is still strong, as 2,000 units were delivered in 2022 with more on the horizon in 2023.
An effective way to gauge if a market is oversupplied is to investigate the ratio of a market’s new units to existing inventory. When taking the entire metro into consideration, only about 1.6% of the total market inventory is under construction, which is a minimal percentage when the national benchmark sits at 4.9% (CoStar). Although many large markets seem poised to flood themselves with new units, Hampton Roads appears not to share the same heightened risk.
2023 Hampton Roads Apartment Supply Forecast
The Hampton Roads under construction pipeline has been steady with over 2,000 units coming online in 2022 and currently 1,900 units underway with more likely to come (CoStar). Most notably Marathon Development’s 4-star, 273-unit Gravity on 400 and the 4-star, 281-unit Fusion at Neon, both in Downtown Norfolk, are expected to open their doors in 2023. Even though Hampton Roads sits comfortably below the national benchmark for under construction units to existing inventory, demand seems to have returned to pre-pandemic norms given the recent uptick in vacancy. We have found that some managers have raised rates considerably, while others have kept rents conservatively low. With a healthy number of new units coming in 2023, we can expect the new developments to put slight pressure on vacancy and rent growth. This is not cause for immediate concern as gains are still noticeably above historic norms, and we find vacancies continue to be fairly low.
Given what we currently know about the Hampton Roads multifamily market and what is expected in 2023, outlook appears good compared to the top 20 metros across the United States. Although we likely won’t see the meteoric rise in rents and historically low vacancy that we experienced in 2021 for quite some time, it is reassuring to see we likely do not have the same risks as larger metros just yet. Given that the market has historically been undersupplied, new development should not only be expected but welcomed as a healthy step forward for the market. Impact of under construction units should be reasonably minor based on household growth, and new business expansion such as Amazon, the Dominion Wind farms, and the tunnel widening project. Furthermore, we also have the advantage of looking at larger regional metros as an example of what to do, or rather in the case of multifamily supply, what not to do.
Written by Thomas McCoy and William Wilson.