Analyzing Local Market Conditions for Multifamily Properties

A local market conditions analysis is the big picture snapshot of the property’s submarket.  It provides data on vacancy trends, net absorption, new deliveries, and under construction inventory.  Together, these metrics tell you whether the market surrounding your property is tightening or softening, and what risks or opportunities that creates.

Vacancy Trends

Vacancy measures the percentage of units that are physically unoccupied.  Rising vacancy signals softening demand, while falling vacancy signals stronger demand and more pricing power.  Vacancy is a direct reflection of the balance between the available supply and renter demand.

Net Absorption

Net absorption measures the net change in occupied units, meaning it tells you whether more units were leased than vacated (positive net absorption), or vice versa which is indicated by negative net absorption.  This metric captures real tenant behavior and leasing velocity.   

New Deliveries

New deliveries are properties that have recently completed construction and entered the market.  These new assets can potentially bring increased competition, lease-up concessions, and aggressive rent promotions.

Under Construction

The under construction pipeline shows how much new product will be delivered over the next 12-36 months.  A large pipeline relative to existing inventory can create future supply risk, even if current vacancy appears stable. 

Objective: The main question we want to answer with this analysis is “will rental demand be impacted at the subject property?”

Additional Considerations: Depending on the subject’s class, vintage, and positioning, other factors may influence demand, such as rent control status, amenity packages, product differentiation, competing tenant profiles, etc.

Example:

The subject property is a 20-unit complex built in 1960 within the city of Los Angeles.  Given the area’s density, a one-mile radius was sufficient to capture representative submarket data. 

Over the past four quarters, vacancy remained stable between 4.8% and 5.3%, currently sitting at 5.2%.  Asking rents increased slightly, up 0.2% from $2,609 to $2,613 since Q3 2024, indicating generally stable conditions. 

The submarket has seen new development: three projects totaling 460 units delivered in Q3 2024, with one additional 200-unit project under construction.  These new assets are significantly larger Class A communities with modern amenities, concentrated along a major commercial corridor.  They are also exempt from local rent control under the Los Angeles Rent Stabilization Ordinance (RSO) and AB-1482. 

Because these new developments represent a different product type catering to a different tenant base, they are unlikely to directly compete with the subject property.  As such, rental demand at the subject property is not expected to be materially impacted.

Why it matters? Local market conditions set the foundation for your underwriting assumptions.  Understanding vacancy, absorption, and new supply helps you price risk accurately and avoid over or underestimating future performance.