By james art Strong tenant demand is supporting the performance of multifamily properties in the Raleigh-Durham area. Year-to-date net absorption 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 20 years. Net absorption has already exceeded full-year totals for both 2022 and 2023. Demand is being fueled by continued housing affordability challenges and a booming local labor market. While most major markets reported slower rates of employment growth, the Raleigh-Durham area maintained an elevated net hiring rate. Wage increases are happening in some of the area’s main industries, led by education and health care, as well as in sectors that represent a smaller share of the local economy, such as construction and hospitality. Continued expansion has kept vacancies tight even as new rental inventory has come online.
Levels of investment activity in Raleigh-Durham are lower than in recent years to this point in 2024. The number of year-to-date transactions is about 35 percent lower than the levels recorded during the same period in 2023. , and is down more than 50 percent from the average volumes recorded since 2019. While fewer properties are changing hands in a higher interest rate environment, sales are still taking place in Class A and Class B properties. rentals built since 2022 have accounted for roughly 30 percent of all significant year-to-date transactions. These properties are typically priced at $250,000 per unit or more. The largest decline in sales velocity occurred in 1980s and 1990s vintage communities, which historically accounted for about one-third of market trade volume. Transactions in these assets are down about 80 percent from recent averages, with properties selling for prices close 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 put additional supply-side pressure on operating fundamentals. So far, the absorption of new units has been steady, well ahead of the totals of recent years. Tenant demand is expected to remain stable over the coming periods, although it will likely be a challenge to keep up with the pace of new construction. The result should be a modest increase in vacancies in the coming months, after two consecutive quarters of slight improvements. In the longer term, the outlook is brightening. The development plan will begin to thin at 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 rental growth, conditions should improve in early 2025.
Investors are expected to gradually increase multifamily transaction activity in Raleigh-Durham in the coming quarters. The pace of sales has been slowed by the combined forces of rising interest rates and competitive pressures associated with continued construction. Both forces should begin to decrease moving forward. Interest rates have already started to decline and further declines are likely in the first half of next year. Although the development pipeline still includes a number of projects — especially in Wake County — leasing activity is up and the number of project starts is down. Recently delivered properties are expected to continue to trade and future growth in the investment market will come with the resumption of transactions involving Class B and Class C assets. Several of these properties sold in 2024, but activity levels have decreased with about 75 percent from recent averages.
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