October 25, 2024

Raleigh-Durham’s Multifamily Absorption Hits a 20-Year High in Q3 2024

Q3 2024

Strong renter demand is supporting multifamily property performance in the Raleigh-Durham area. Net absorption year to date has totaled nearly 5,000 units, including more than 2,300 units in the third quarter alone. This marked the highest quarterly total net absorption in at least the past 20 years. Net absorption has already surpassed the full-year totals for both 2022 and 2023. Demand is being fueled by continued housing affordability challenges and a thriving local labor market. While most major markets are posting slower paces of employment growth, the Raleigh-Durham area has sustained an elevated rate of net hiring. Payroll additions are occurring across some of the area’s core industries, led by education and health, as well as in sectors that account for a smaller share of the local economy, such as construction and hospitality. Continued expansion has kept vacancy in a tight range, even as new rental inventory has come online.

Investment activity levels in Raleigh-Durham have been lighter than in recent years to this point in 2024. Transaction counts year to date are about 35 percent lower than levels recorded during the same period in 2023, and are down more than 50 percent from average volumes recorded since 2019. While fewer properties are changing hands in the higher interest rate environment, sales are still occurring in Class A and Class B properties. Rental communities built since 2022 have accounted for roughly 30 percent of all significant transactions year to date. Pricing in these properties is generally $250,000 per unit or higher. The greatest decline in sales velocity is occurring in 1980s- and 1990s-vintage communities, which have historically totaled about one-third of the market trading volume. Transaction counts in these assets are down about 80 percent from recent averages, with properties selling for prices closer to $150,000 per unit.

Looking ahead

Developers are expected to remain active through the remainder of this year and into 2025 in the Raleigh-Durham area, which should place some added supply-side pressures on operating fundamentals. To this point, absorption of new units has been robust, significantly outpacing totals from recent years. Renter demand is expected to remain healthy in the coming periods, although it will likely prove challenging to keep pace with new construction. The result should be a modest vacancy uptick in the coming months, following two consecutive quarters of slight improvements. Longer term, the outlook brightens. The development pipeline will begin to thin by this time next year, and the drivers that have fueled demand are expected to remain in place. While 2024 will be a year of limited rent growth, conditions should strengthen beginning in 2025.

Investors are expected to gradually increase multifamily transaction activity in Raleigh-Durham in the coming quarters. Sales velocity has been slowed by the combined forces of elevated interest rates and the competitive pressures associated with continued construction. Both of these forces should begin to ease going forward. Interest rates have already started to trend lower, and further declines are likely into the first half of next year. While the development pipeline still has a number of projects—particularly in Wake County—leasing activity has been elevated and the number of starts is declining. Recently delivered properties are expected to continue to trade, and the future growth in the investment market will come as transactions involving Class B and Class C assets resume. A few of these properties have sold in 2024, but activity levels are down about 75 percent from recent averages.