The multifamily market has spent the better part of two years absorbing the largest wave of new supply since the 1980s, and the numbers have finally caught up with the narrative. National vacancy has climbed to 8.6%, the highest level in years, while asking rent growth has flattened to roughly 0.2% annually. Absorption through the first five months of 2026 fell 61% year over year, with just 108,000 units absorbed. Occupancy has slipped to 94.1%, down 60 basis points from a year earlier, and among the top 30 markets tracked by Yardi, only San Francisco posted an occupancy gain.

“The second quarter this year was the big pivot everyone has been waiting for,” said Greg Willett, Chief Economist at LeaseLock. “We are starting to see price corrections, particularly for the bottom part of the market.” That correction has not translated into transaction volume, though, because the financing environment has not settled enough for buyers and sellers to agree on value. “The wildcard has been interest rates,” Willett said. “It has created some price correction but they haven’t stabilized in order to see better deals come to the market.” The result is a market where owners who might otherwise sell are holding assets, which puts more weight on operating performance to carry returns that would previously have come from a sale.

That pressure is changing how operators fill units, and the change is not always visible in the concession data everyone tracks. “Concessions are not always financial,” said Janine Jovanovic, CEO of LeaseLock. “Sometimes they include choosing a less qualified renter.” A month of free rent shows up in effective rent calculations and eventually reverses when the market tightens. A resident approved with a thinner credit file, a shorter employment history, or a rent-to-income ratio outside normal underwriting standards does not show up anywhere until the tenancy produces a loss. The concession is real, it is being granted at scale, and it is largely unmeasured.

The scale of risk is not negligible. Roughly one third of all move-outs result in financial loss for the operator, whether through unpaid rent, damage exceeding the deposit, skips, or eviction costs. That baseline was established in a market with tighter screening standards than the one operating today. Loosening criteria to hold occupancy in an oversupplied market pushes that number in one direction, and the losses arrive on a delay of six months to a year, well after the leasing decision that produced them.

Deposits are moving in the same direction at the same time, which compounds the exposure. Operators competing for a shrinking pool of qualified applicants are reducing move-in costs, and lower deposits mean less coverage when a tenancy goes badly. In the workforce and affordable segments the reductions have been significant. One LIHTC operator moved the bulk of its portfolio to a flat $250 deposit for applicants approved without conditions in late 2025, rising to $500 for conditional approvals, against market-rate units where a full month’s rent remains standard.

The assumption that lower deposits are straightforwardly good for renters deserves more scrutiny than it usually gets. “It seems like a discount for renters, but if they don’t pay their debts the landlord still comes after them, and that can mean a lot of other fees that they have to pay,” Jovanovic said. “It’s an illusion of affordability and it clogs the court system quite a bit.” A renter who moves in with a $250 deposit and leaves owing $3,000 has not saved money. They have deferred an obligation that now arrives as a collections action, with legal fees and court costs attached, and a judgment that follows them into every future rental application. The lower barrier at move-in produced a higher cost at move-out, and the operator absorbing the loss did not avoid it either.

Regulation is pushing deposits down independently of market conditions, which means this dynamic is not going to reverse when occupancy recovers. Roughly 30 states plus the District of Columbia now impose a statutory cap on deposits, with about 20 leaving it to the lease. The most common cap is one month’s rent, now the standard in California, Colorado, Delaware, Hawaii, Maryland, Massachusetts, Nebraska, New Hampshire, New Mexico, New York, Rhode Island, and DC. The trend line is one-directional. Georgia added a two-month cap in July 2024, Maryland moved to one month in October 2024, and Colorado adopted a one-month cap in January 2026 through HB 25-1249. California layered on AB 2801, effective July 2025, requiring photo documentation for any deduction.

Security deposit alternatives have grown alongside those constraints, and the current environment is accelerating adoption. The products let a renter pay a smaller upfront fee in exchange for coverage that protects the owner against unpaid rent and damage, which addresses the affordability problem at move-in without leaving the owner exposed at move-out. New York City established a pre-qualified list of security deposit alternative providers through HPD and HDC for city-sponsored affordable housing, and regulatory momentum in markets including Seattle and California has consistently driven upticks in adoption.

The logic of that adoption becomes more compelling the longer current conditions persist. Owners are accepting more credit risk to maintain occupancy while simultaneously holding less collateral against it, in an environment where they cannot easily sell their way out of a underperforming asset. Every additional jurisdiction that caps deposits removes another tool from the traditional risk management approach without removing the risk itself. What replaces it will either be a product designed for the purpose or a growing line item for bad debt. The operators thinking about this now are the ones who noticed that the market softened faster than their underwriting standards did.

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