Omaha, Nebraska, returned atop the leaderboard for year-over-year multifamily rent growth in the third quarter after leading all major markets in the first three quarters of last year, posting annual gains of 3.5%.
Not only does that tie for first among the 52 markets nationally with at least 75,000 units of inventory, but it also distinctly exceeds the 2.4% average annual rent growth in the five years leading up to the pandemic, the oft-referenced period of normalcy.
Midtier properties have led the gains, with year-over-year rents increasing by 4.4%, also ranking first across all major U.S. markets. That is a notable uptick from the 2015 to 2019 average of 2.6%, which ranked among the bottom 10 across all major markets nationally. The three-star segment’s recent outperformance stems from supply and demand-side dynamics.
From a demand standpoint, though job growth has been remarkably resilient across all sectors except financial activities over the past year, gains have been historically robust in the typically middle-income sectors that drive midtier absorption, or move-ins minus move-outs.
Notably, year-over-over employment growth in the education and health services sector has exceeded 4% in every month over the past year, a feat not attained in any month from 2010 to 2019, including seven straight record-setting months of annual gains exceeding 6%. The 8.1% year-over-year growth in August ranks second-strongest across the 65 largest U.S. metropolitan areas by population, distinctly above the 1.4% average annual growth in August from 2015 to 2019.
As a result, on the heels of the 10th-strongest quarter of three-star absorption on record in the second quarter, the third-quarter demand formation of nearly 150 units is over twice the absorption recorded in any third quarter from 2015 to 2019.
On the supply side, after hitting an all-time high in completions of over 1,200 units in 2023, three-star development has cooled substantially, with just under 500 units of annual completions as of the end of the third quarter. That pushed year-to-date and trailing 12-month demand above supply for the first time since 2021, compressing the midtier vacancy rate to 5.3%, in line with pre-pandemic levels despite the unprecedented supply wave. Since the start of 2021, aggregate demand has exceeded supply by over 100 units in the midtier segment.
Comparatively, while four- and- five-star annual rent growth of 2.4% still outpaces the five-year pre-pandemic average of 2%, cumulative supply has surpassed demand by over 100 units since the start of 2021, keeping the vacancy rate in the high-end segment elevated at almost 10%.
Geographically, the fast-growing suburbs continue to drive gains, with year-over rents increasing by an average of 3.8% across the suburban apartment landscape, compared to the 2.3% average annual rent growth in the urban clusters of downtown Omaha and midtown.
Market-wide, the underlying demand drivers of robust job and population growth coinciding with easing supply-side pressure will likely keep rent growth historically strong across all quality segments and locations. The elevated interest rate environment and a pullback in construction lending have slowed new construction starts over the past year, cooling 2024 projected completions to 1,800 units, according to CoStar’s baseline forecast. That represents a roughly 40% year-over-year drop-off, the second most substantial among all major markets nationally. In turn, CoStar’s base case forecast calls for annual rent growth to remain at 3.5% by year-end, the second-strongest across the 52 U.S. markets with at least 75,000 units of inventory.
