Supply Growth Decelerates and Demand Expands
After a challenging 2024, we believe the US national apartment market is poised for a significant turnaround in fundamentals, driven by a combination of decelerating supply growth and expanding demand.
Supply Dynamics: Recent higher interest rate and inflationary trends indicate that the prior record supply of new apartment units is beginning to wane. According to national data from CBRE, new supply multifamily apartment inventory additions that peaked in 2H 2024, significantly above the national long-term average of 3% (with some markets experiencing supply growth as high as 5% of existing inventory) are abating. Similarly, (i) we expect new completions to decrease from the recent high pace of ~590k units per quarter to below the trailing 5-year average of ~373k units per quarter, particularly in late 2025 to early 2026, and (ii) we observe new construction starts, according to Freddie Mac, at a 10 year low.
Demand Expansion: On the demand side, several factors are contributing to an uptick leading into 2025. Strong employment growth, particularly among younger demographics like Gen Z, is driving household formation at rates higher than seen in previous cycles. The labor market's tightness has enabled this younger generation to earn more at an earlier age, fueling demand for rental apartments. Moreover, the high cost of homeownership due to elevated mortgage rates and a constrained supply of for-sale homes cause apartments to be a more affordable option, thereby supporting sustained demand for rental properties.
Impact on Market Fundamentals
Occupancy Rates: With new supply decelerating, we believe occupancy rates will increase or stabilize. Markets that have been under pressure from new supply are expected to see occupancy rates rebound as demand catches up, potentially reaching or exceeding the mid-90s percent level that we consider optimal for multifamily rental profitability.
Rent Growth: Despite recent deceleration in rent growth in areas with high supply, we expect the reduction in new apartment deliveries should lead to a normalization of higher rent increases. As demand expands, landlords can adjust rents in line with economic fundamentals, leading to positive rent growth across many markets, especially those where supply is now aligning more closely with demand.
Investment Appeal: In our view, the apartment sector is becoming an attractive investment again due to these fundamental shifts. The potential for rent and corresponding NOI growth coupled with increasing occupancy will make multifamily properties appealing for both equity and debt investors.
Market Stability: We anticipate a convergence of reduced new supply and increasing demand for multifamily rentals, which suggests a move towards greater market stability and rising profitability. We believe the recent volatility experienced due to an imbalance between supply and demand will diminish, providing a more predictable environment for all stakeholders, including developers, investors, property managers, and tenants.
Geographical Variation: While we believe the national trend points towards improvement, geographical nuances will dictate local market performance. We expect Sunbelt markets, which have experienced much of the recent surge in supply, to see a slower recovery due to the sheer volume of units delivered. Conversely, markets in the Midwest, with less supply pressure, have the potential for a more immediate and robust recovery in fundamentals.
As supply growth decelerates and demand for apartment living continues to expand, we believe national apartment market fundamentals will significantly improve and manifest through higher occupancy rates, a return to consistent and positive rent growth, and rising profitability all in the context of reduced market volatility.
Sources: RealPage.
Disclosures
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