Demand Remains Very Strong for U.S. Apartments

In the first half of 2024, the U.S. witnessed a remarkable surge in apartment demand, adding 257,000 renters, marking the second-largest increase of any first half since 2000. This robust demand underscores that despite challenges in the multifamily housing sector emanating primarily from a recent supply surge, fundamental demand remains steadfast.

Factors Contributing to the Demand Boom:

• Apartment Rent Growth is Generally Flat
  • Consumer inflation, excluding shelter, has stabilized at 2%, while apartment rent growth remains at 0%.
• Strong Wage Growth
  • Strong job and wage growth, particularly among young adults, have likely unleashed pent-up demand for apartments.
• New Apartment Supply Unlocks New Apartment Demand
  • The increase in apartment supply plays a crucial role. As new apartments become available, the potential for absorption increases, unlocking demand for newer units.
• Apartment Rents are More Affordable
  • Affordability is shifting back to a positive influence. Although some may doubt this trend, a closer look at professionally managed, market-rate units reveals that wage growth has outpaced rent growth for over 16 months. This dynamic has pushed rent-to-income ratios back to levels seen in 2019, making apartments more affordable for many renters.
• Would-Be Homebuyers Staying in More Affordable Rental Apartments
  • The market includes would-be homebuyers who, facing challenges in purchasing homes, remain in the rental market. While this does not entirely account for the new demand, it reduces the number of renters moving out to buy homes, thereby lifting the net number of renters.

However, it is important to note that while demand is significant, new supply is even larger. In the first half of 2024, the U.S. added 284,000 new apartments, a long-term peak nearly three times the average from 2000 to 2019. This surge in supply keeps apartment rent growth at around 0%. The supply wave is expected to extend into the second half of 2024 before experiencing a substantial decline. If the demand for apartments remains steady, rents could be poised for a strong rebound in 2025, and beyond, as apartment deliveries are expected to slow, according to recent analyses of apartment starts.

In summary, the multifamily housing market is experiencing a period of very strong demand driven by favorable economic conditions, significantly increased supply, and improved affordability. While the multifamily supply currently outpaces demand, the overall health of the market remains robust, with fundamental demand showing no signs of waning.

New Apartment Construction Starts Rapidly Declining

While we are currently experiencing a wave of new apartment construction deliveries, new apartment construction starts have declined by 55% since their peak of 614,000 units in April 2022. The lag between new apartment starts and their delivery typically varies but is generally around 12 months. Therefore, significant drops in new apartment deliveries are expected to begin in 2025. If demand remains strong, this environment may be primed for stronger rent growth in 2025 as the supply of new apartments slows.

The primary reason for the rapid decline in new apartment starts is that the economics of apartment development are no longer viable in an environment with flat rents and expensive debt. To make matters worse for developers, new apartment projects are not just less profitable; many might be outright unprofitable unless rents increase or costs, especially debt, significantly decrease. In addition, bank lending for new apartment construction is in flux and currently difficult to obtain due to credit conditions and potential future banking regulation. Therefore, it is reasonable to expect the cost of construction lending whether via bank or non-bank lending may have tighter terms and be more expensive. A potential construction lending hiatus or increased cost and tighter lending terms will significantly contribute to the favorable demand supply imbalance in the near term.

Consequently, it is often cheaper for investors to buy existing apartment properties rather than build new ones. While a wide variety of metrics are used to assess the viability of acquiring properties, one key indicator of a potential buying opportunity is when the cost of acquiring a property is substantially less than the cost of developing a new one.

Key Takeaways from Recent Apartments.com Renter Survey 

At Providence Real Estate, we prioritize understanding current renters’ needs and preferences to better serve our community. While we do our own renter surveys, here are some key insights from a recent survey conducted by Apartments.com that included 30,000 current and prospective renters covering all 50 states and the District of Columbia, highlighting notable trends in the rental market:

• Increased Mobility Among Renters
  • Nearly half of the surveyed renters plan to move within the next six months, the highest turnover expectation in two years. This trend is driven by the broader availability of rental alternatives, including a surge in new apartment supply and expanded single-family rental options, reflecting a dynamic and fluid housing market.
• Limited Research Time by Renters
  • Surprisingly, seven out of ten renters contact only one property through Apartments.com, with 68% considering only two to three properties seriously. This limited engagement suggests that while initial inquiries may be minimal, further exploration might occur through other channels. Alternatively, renters may be making significant decisions with minimal research.
• Growing Comfort with Online Renting Decisions
  • The survey reveals that 37% of renters are likely to rent sight unseen, although in-person tours remain the most preferred method. This indicates a growing comfort with virtual renting, potentially driven by technological advancements and changing preferences.
• Shift in Communication Preferences
  • Renters’ communication preferences have shifted, with fewer opting for phone interactions. Phone calls are now the third choice behind email and in-person communication, yet still ahead of texting.
• Importance of Pet-Friendly Policies
  • Pet-friendly policies are crucial, with 41% of renters considering them essential. This reflects a higher priority on pet accommodations than actual pet ownership statistics suggest, underscoring the importance of amenities that cater to renters’ lifestyles and preferences beyond basic living arrangements.

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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