In this update, we will review several key topics shaping the multifamily market and our portfolio:

• Apartment Rents Fall Unexpectedly Amid Prolonged Oversupply
• Supply and Demand Both Remain Elevated for Apartments
• Construction Delays Shifted the Cycle and Pushed the Recovery Timeline to 2026
• Renter Fundamentals Remain Strong — A Positive Signal for Value-Add Multifamily
• Value-Add Window of Opportunity May be Re-Opening in 2026
• Institutional Capital Still on the Sidelines — Creating a Rare Acquisition Window

Apartment Rents Fall Unexpectedly Amid Prolonged Oversupply

U.S. apartment rents posted an unexpected decline in October, signaling a turning point in a supply-heavy rental cycle that many, including Providence Real Estate, expected would stabilize sooner. While the decline marks one of the sharpest fall rent declines in more than 15 years, it is being viewed less as a long-term shift and more as a delayed normalization—one that could position value-add investors for a favorable entry window ahead of tightening fundamentals in 2026.

New survey data from Yardi Matrix showed advertised asking rents falling $4 to $1,743 in October across 140 tracked markets, marking the third consecutive month of declines and making another October characterized by softening rents. Year-over-year rent growth remained essentially flat at 0.5%. The build-to-rent subsector, which had outperformed earlier in the cycle, also felt the pressure, with rents dipping another $6 to $2,195.

CoStar data confirms the national cooling. According to its latest report, average U.S. apartment rents fell to $1,708—a 0.3% decline from September and the fourth straight month of zero or negative movement. By historical comparison, three of the five steepest monthly rent declines in over 15 years have occurred in just the last three months.

Supply and Demand Both Remain Elevated for Apartments

The CoStar chart below shows that new apartment deliveries (blue bars) have consistently exceeded absorption (orange bars), especially since 2022, despite absorption remaining strong and at times exceeding 100,000 units leased. This imbalance—driven largely by heavy Sunbelt-focused construction—has pushed vacancy rates higher. While earlier industry forecasts assumed new supply would begin tapering in 2025, the updated outlook suggests a more delayed decline, with meaningful moderation in deliveries likely occurring in 2026. As deliveries fall and absorption remains steady, the forecast projects vacancy rates gradually declining through the end of the decade.

This nationwide rental rate pullback was not widely anticipated. Many in the industry expected 2025 to mark the beginning of meaningful recovery after two years of construction-driven price pressure. Instead, the supply surge that began in 2022 and peaked in 2024 has continued to outpace absorption, particularly in high-growth Sunbelt and Mountain West markets. Denver saw the steepest monthly decline at 1.3%, followed by Austin at 1.1%. Seattle, Salt Lake City, and Phoenix also posted notable decreases.

But the weakness is uneven, and where supply has been limited, fundamentals are already strengthening. San Francisco posted annual rent growth of 5.8%, followed by San Jose at 3.8%, Chicago at 3.6%, and Norfolk at 3.0%—evidence that affordability constraints and limited new construction are supporting demand in higher-barrier markets.

Construction Delays Shifted the Cycle and Pushed the Recovery Timeline to 2026

A major reason the industry misread the timing of this cycle is that most early forecasts assumed normal construction durations. Historically, large multifamily projects took roughly 18–20 months to build. Today, many require closer to two to three years, depending on scale and market. Recent surveys from national real estate and construction associations show that nearly half of developers are still reporting delays, even as material shortages and permitting backlogs slowly improve.

Those extended timelines reshaped the delivery schedule. Projects financed and started during the boom years of 2021–2023 were expected to complete in late 2024 and early 2025—not late 2025 or 2026. Instead of a clean decline in new supply aligning with 2025—as earlier models suggested—the industry is experiencing a stretched delivery curve. Data from recent construction reports shows:

• Garden projects (low-rise, wood-frame communities with surface parking) now average a record-high over 24 months or 741 days to complete
• Mid-rise buildings (typically 4-7 stories with structured parking) average 27 months or 825 days to complete
• High-rise projects (steel or concrete towers 8 stories and above) remain well above pre-pandemic timelines at 25 months or 761 days to complete

At the same time, starts and permits have already fallen sharply, dropping roughly 30–40% from peak levels. But because today’s extended delivery cycle delays the impact of that slowdown, fewer groundbreakings won’t translate into meaningful reductions in completions until 2026.

This explains why rents and vacancy did not stabilize when many expected them to: the supply peak shifted. Simply put, the market isn’t late in recovery—it’s late in completing the final wave of construction.

These delays don’t change the fundamentals—household formation, limited homeownership affordability, and a national housing shortage—but they do change the timing.

Renter Fundamentals Remain Strong — A Positive Signal for Value-Add Multifamily

One of the most important indicators of stability in multifamily investing is the financial well-being of residents. In Providence Real Estate’s portfolio today, our experience is clear: renters are in very good financial shape, and we are not seeing signs of financial stress or erosion in payment quality. Collections remain solid, turnover patterns are normal, and credit behavior remains healthy across communities.

This mirrors national data, particularly among households earning $50,000–$99,000, which make up the core resident demographic for most Value-Add multifamily housing. The share of renters in this segment reporting a recent loss of pay—known as the pay-loss rate—has been remarkably stable, hovering just below 10%, a level widely viewed as normal and healthy. In short, while economic headlines may convey volatility, measurable financial strain among renters in this income range remains limited.

Wage growth further reinforces this strength. Real hourly wages in the United States are now higher than at any previous point, even after adjusting for inflation. Despite contrary sentiment on social platforms, the data is unequivocal: Americans today earn more in real terms than any previous period. Even the lowest-earning 10% of workers—well below the profile of our typical resident—have seen real wage growth of roughly 40% since 1973. For the median worker, real wages are also meaningfully improved.

For multifamily investors, the most relevant lens is affordability, and current national rent-to-income ratios stand near historically low levels. Today’s figure—approximately 25.2%—reflects a healthy balance between household earnings and housing costs. To put this into context, the median rent-to-income ratio since 2015 has been roughly 27.5%, meaning today’s affordability is approximately 8% better than the long-term norm. This improvement reinforces what we observe operationally: our renters are not stretched. They are financially secure and comfortably able to meet their housing obligations.

Multifamily Rent to Household Median Income

2015 to 2025

Source: CoStar.

At the same time, the sector continues to work through significant new supply, especially in the high-growth markets in the Southeast where Providence Real Estate is most active. This large wave of new multifamily construction is temporarily suppressing rent growth—even though renters are financially positioned to absorb increases. In many cases, residents could pay more today, but the market doesn’t require it given the elevated levels of competing units.

We expect this dynamic to shift meaningfully in 2026, as deliveries finally taper and the supply overhang moderates. When that happens, we anticipate renewed rental pricing power—supported not by forced increases, but by solid fundamentals and the financial capacity of residents. The current stability in wages, employment, and affordability strongly suggests that when rents begin to rise again, residents will be in a position to absorb those increases without distress.

The results of this improvement in rent-to-income affordability can be seen in a simple example. A household earning $85,000 annually would have paid approximately $2,005 per month when rent-to-income ratios averaged 28.3%, as they did in the third quarter of 2021. By the third quarter of 2025, that same household would be paying roughly $1,785 per month based on the current 25.2% rent-to-income ratio. That represents a meaningful monthly savings of $220—or more than $2,600 annually.

For investors, this matters: it demonstrates not only improved affordability, but also that renters today have additional financial capacity. Should the current oversupply normalize and pricing power return in 2026, residents are well positioned to absorb higher rents without distress—further reinforcing the durability of demand and the long-term strength of the income profile in well-located, value-add communities.

Value-Add Window of Opportunity May be Re-Opening in 2026

For investors in value-add multifamily, these conditions are noteworthy. Elevated vacancy, softer rents, and more disciplined lenders have slowed transaction velocity and placed stress on undercapitalized owners, especially those facing refinancing at higher rates. At the same time, declining new starts—expected to fall more than 55% in 2026—are setting the stage for the next rental tightening cycle.

CoStar has revised its rent outlook downward, now projecting a modest negative rent change of 0.1% in the fourth quarter of 2025. But critically, the fourth quarter is also forecasted to be the first time since 2021 that renter demand exceeds newly delivered units. Vacancy rates are expected to hover around 8.2% through next year before gradually receding to 7.9% in 2026.

While the timing has shifted, long-term demand drivers—limited for-sale housing, demographic household formation, and a structural national housing shortage—remain in place. With new supply pipelines now meaningfully contracting, the forces currently compressing rent growth are approaching their peak.

For value-add operators, this matters. Strong rent growth and improving fundamentals are core return drivers, and in today’s supply-heavy environment, renovation programs must be sequenced thoughtfully. Residents have the income capacity to pay higher rents, but the volume of available inventory means they don’t yet need to. As supply moderates and the market resets in 2026, we expect both organic rent growth and renovation premiums to expand. This dynamic positions 2026 as a potentially strong year for value-add execution and operational uplift.

For value-add multifamily investors, the implications are clear: short-term uncertainty is creating pricing dislocation, operational leverage, and acquisition opportunities not seen since the pre-pandemic cycle. The recovery remains ahead—but it is increasingly shaping up as a 2026 story, not a 2025 one.

In the meantime, well-capitalized operators with disciplined underwriting, renovation capability, and strong operating systems—like Providence Real Estate—may find that the window opening now is precisely the one the sector has been waiting for.

Institutional Capital Still on the Sidelines — Creating a Rare Acquisition Window

In addition to improving renter fundamentals and the approaching shift from oversupply to rental recovery, there is another factor creating potential opportunity: institutional capital has not yet significantly returned to the multifamily acquisition market. Many large institutional investors are still working to repair their balance sheets after significant losses, particularly in the office sector post-pandemic. Others have paused new allocations due to reduced or suspended distributions from real estate funds affected by higher financing costs and muted growth.

As a result, many institutions remain inactive, hesitant, or unable to deploy capital—even in fundamentally resilient sectors such as value-add multifamily. This has created an unusual imbalance: a sizable pipeline of multifamily properties on the market, especially larger assets, but a far smaller buyer pool than normal. In past cycles, these properties would have attracted multiple competitive institutional bids; today, many have no natural bidders at all.

We do not expect this dynamic to persist once the rent trajectory shifts. Historically, institutional capital returns quickly—and aggressively—once evidence of rent growth, declining vacancy, and normalized absorption becomes measurable. With supply beginning to be absorbed and forecasts now pointing to strengthening rental fundamentals in 2026, that moment may be approaching.

For disciplined, well-capitalized investors, this period may represent a rare entry point—one where assets can be acquired without having to compete against the largest players in the market, and ahead of what appears to be an almost inevitable period of strengthening rental performance. In our view, the combination of temporarily softer pricing, improving renter financial capacity, declining new construction starts, and sidelined institutional capital may mark this moment as one of the most compelling acquisition environments since the early post-GFC recovery. As the cycle resets and capital flows return, the advantages will shift back toward sellers. Right now, however, the opportunity belongs to buyers.

About Providence Real Estate

Since 1985, Providence and its affiliates have actively operated as owner-operators of multifamily residential communities. Its principals have acquired over 65,000 apartment units, worth over $7.5 billion. Providence comprises an experienced team of professionals dedicated to searching for, identifying, acquiring, renovating, and operating multifamily properties in select U.S. markets. As a fully integrated real estate organization, Providence includes divisions for Property, Asset, and Construction Management; Acquisitions; Accounting; Information Technology; Human Resources; and Business Development. To learn more please visit https://www.provre.com.

DISCLAIMER

The information contained in this letter is provided solely for informational and discussion purposes. It is not intended as an offer to sell, nor a solicitation of an offer to buy, any security. This document may not be relied upon in connection with the purchase or sale of any security. Any such offer or solicitation will be made exclusively through a confidential Private Placement Memorandum (PPM), subscription documents, and governing documents. These offering materials must be reviewed thoroughly before making any investment decision, as all information herein is qualified in its entirety by those documents.

This letter also contains forward-looking statements, which are based on current assumptions and expectations and involve risks and uncertainties. Actual results may differ materially, and Providence Real Estate undertakes no obligation to update any such statements.

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