The apartment business follows a straightforward principle: when demand outpaces supply, the market tends to perform well. The balance between supply, demand, and key influences like economic conditions, interest rates, and regional development is always shifting. Right now, we are witnessing major shifts in these areas, reshaping the apartment market and presenting both opportunities and challenges for investors. Let’s explore the current supply and demand dynamics and their impact on the industry.

Supply

Multifamily supply is currently at a 50-year high, according to RealPage Analytics. This surge was driven by the historically low interest rates seen in 2020 and 2021, prompting developers to build a significant number of apartments. As a result, much of the country is experiencing flat or declining rents. In the U.S., rents fell by 0.5% month over month in September.

Regional differences in rent performance have emerged as a result of varying supply levels across the country. The South and West have been the most heavily supplied, which has led to some of the largest rent cuts. According to the chart, Austin experienced the deepest rent cuts at 8.1%, followed by Raleigh/Durham at 5.2%, and Jacksonville at 5%. Meanwhile, the Midwest has seen much less supply, and as a result, rents have increased by 2.9% in September, the highest of any region.

The dynamics of supply are changing rapidly. Currently, there is a significant gap between the number of projects completing construction and the number of new construction starts. Q3 of 2024 marked what many analysts believe to be the peak of completions, with supply reaching a 50-year high this year. Looking ahead, the data shows that multifamily supply is expected to decline sharply from 2025 to 2027, as fewer new projects break ground.

Demand

Demand, commonly measured by "absorption," refers to the net change in the number of rented or occupied units over a given period. In simpler terms, absorption tracks how many units are newly leased minus those vacated. A high absorption rate indicates that rental units are filling quickly, a sign of strong demand. In Q3 of this year, 190,000 units were absorbed, which marks a sharp increase compared to 100,000 in Q2 and fewer than 50,000 in Q1.

The surge in absorption occurring in Q3 of this year has contributed to lower vacancy rates in certain markets. For example, in Minneapolis, Michel Commercial reported 8,671 units under construction, while more than 11,000 units were absorbed over the past 12 months. This strong absorption helped drive the vacancy rate down from 8.6% to 7.3%, illustrating how demand is outpacing supply in some areas.

Several factors influence demand (absorption) in the multifamily market, including:

• Job Opportunities: The availability of jobs in a region is a primary driver of demand, as individuals often seek housing close to their workplaces.

• Population Growth: An increasing population typically leads to greater demand for rental units, especially in urban areas.

• High Cost of Homeownership: The rising cost of buying a home makes renting a more attractive option for many, particularly for younger generations. Many younger individuals are choosing to rent rather than pursue homeownership, often due to the burden of student debt. This trend is reshaping the rental market and driving higher absorption rates.

Strategic Impact

We are currently focusing on acquiring properties in strong locations because we believe the expected decrease in supply will lead to significant rent growth in the coming years. Additionally, we see an opportunity to explore development projects. If these projects take approximately two years to complete, we could potentially be entering the market during a period of reduced supply. As interest rates gradually decrease we believe more development deals start to pencil.

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