Inflation and recession fears pushed renters away from higher-priced, amenity-rich developments as rent growth at the highest tiers slowed to 1.5 percent annually, according to a new CoStar analysis.

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Economic uncertainty continued to drive the rental market during the first quarter of the year, according to CoStar’s latest market report published on Tuesday. The mid-to-luxury multifamily segment suffered the most, as renters attempted to hold onto more affordable units. From January to March, national rent growth slowed 1.3 percent quarter-over-quarter to 2.5 percent.

Jay Lybik | Credit: CoStar

“While we kicked off 2023 with positive monthly rent growth in January and February, we’ve still witnessed signs of weakness across the multifamily sector,” CoStar Group National Director of Multifamily Analytics Jay Lybik said in a prepared statement on Tuesday. “Economic uncertainty has suppressed household formations, and consumer confidence sits at low levels due to high inflation, Fed interest rate hikes and recession fears.”

The multifamily market is on track to experience the largest biggest jump in new inventory since 1981, with more than 1 million units under construction — 104,000 of which were delivered in Q1. However, economic anxiety has weakened renter demand for expensive units at five-star and four-star developments.

“[Slower rent growth] will likely be most pronounced in four- and five-star properties, which are typically luxury mid- to high-rises with resort-style amenities, where many new developments are occurring,” the report read. “At the end of the first quarter, four- and five-star properties had the highest vacancy rate, at 8.7 percent, and the lowest rent growth, at 1.5 percent.”

That trend also trickled down to the three-star multifamily market, as renters struggled to grapple with the pressure of past rent increases and the impact of inflation on their overall budgets. Vacancy rates at these properties rose 2.3 percent over the past six quarters to 6.4 percent — the highest vacancy rate of any multifamily segment.

High vacancy rates notwithstanding, rent growth for three-star properties still outpaced national growth at 3.1 percent year-over-year.

On a market-by-market basis, Miami fared the worst in Q1 with annual rent growth dropping 3.0 percent to 3.8 percent — a far cry from last year’s 18 percent peak and the largest decline seen among the nation’s largest 40 markets. On the other hand, Indianapolis led the pack with 6.6 percent annual rent growth, alongside other Midwest markets like Cincinnati (+6.0 percent YoY), Columbus (+5.0 percent YoY) and St. Louis (+4.6 percent YoY).

Lybik said the multifamily market’s Q2 performance hinges on the absorption rate, which reached 43,000 units in Q1 or 41.3 percent of newly delivered units.

“If absorption can match deliveries by the end of the second quarter, the multifamily market might see some stabilization,” he said. “However, the downside risks dominate, including potential weakening in the labor market and tighter financial conditions. The next 90 days, which represent the critical spring leasing period, will set the tone for how multifamily will perform the rest of the year.”

Email Marian McPherson

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