In this letter, we will review the following key themes shaping the multifamily market:

• Absorption Offsetting Record Supply—And Setting Up for a Tight Market Ahead
• Lease Trade-Outs Improving, But Full Recovery Not Yet Reached
• Harvard’s 2025 Housing Report – Middle Income Renters Underserved
• Middle-Income Renters’ Wages Outpacing Multifamily Rent Growth

Absorption Offsetting Record Supply—And Setting Up for a Tight Market Ahead

So far in 2025, multifamily absorption has been remarkably strong—an underappreciated stabilizer amid a historic wave of new supply. Absorption, which refers to the number of newly leased units driven by new renters (not existing tenants relocating), reflects genuine demand growth. That demand is accelerating: RealPage reports over 227,000 units absorbed in Q2 2025 alone, the highest second-quarter figure since the leasing peaks of 2021 and early 2022. This surge puts year-to-date absorption on pace to exceed previous annual records, underscoring resilient renter interest despite economic uncertainty.

Operators are prioritizing occupancy over rent growth. National occupancy reached 95.6% in June—up 140 basis points year-over-year—while rent growth remained subdued, with just a 0.19% monthly gain. Many owners are still offering concessions to fill units, and lease renewal percentages climbed to 55.1%, suggesting renters are staying put and landlords are focused on retention.

On the supply side, the pipeline is tightening. While more than 535,000 units were delivered in the past year—including 108,000 in Q2—deliveries have already slowed from the record highs of late 2024. Multifamily starts are now 74% below their 2021 peak and 30% below pre-pandemic averages, with only 316,000 annualized starts as of mid-2025. New permits have also dropped nearly 16% year-over-year, indicating that the construction boom has peaked and future supply is set to decline sharply.

This pullback is not due to a lack of available debt, but because new projects often fail to “pencil”—projected returns don’t justify today’s risks. Rising construction costs, elevated interest rates, and tariff uncertainty have made development financially unviable for many. While lending remains accessible, equity is scarce and highly selective, typically reserved for low-cost or prime-location projects led by experienced and well capitalized sponsors. Many investors now prefer acquiring existing properties—often at prices below replacement cost—further slowing ground-up construction.

As the current pipeline is built out and fewer new projects commence, annual deliveries are projected to fall below historic norms by 2027 and 2028. This reduction, paired with ongoing demand, is expected to fuel a cyclical recovery. CBRE forecasts a national vacancy rate of 4.9% and annual rent growth of 2.6% by year-end 2025. Even high-supply Sun Belt and Mountain markets are seeing improved fundamentals, with 10 of the 16 most supply-heavy metros already past their delivery peaks and the remainder expected to peak this year.

Though many Sun Belt regions face short-term challenges from new apartment supply, long-term fundamentals remain exceptionally strong. Population growth, job creation, and the growing affordability gap between renting and owning—homeownership now costs 2–3x more than average rent in many markets—continue to drive multifamily demand. With nearly 80% of U.S. homeowners holding sub-5% mortgages, home listings remain limited, further boosting rental appeal.

In short, absorption is doing more than offsetting excess supply—it’s laying the foundation for a multifamily rebound. As new construction continues to retreat and demand remains steady, the sector is well-positioned for a sustained recovery beginning in 2026.

Lease Trade-Outs Improving, But Full Recovery Not Yet Reached

Lease trade-out—a key industry metric—refers to the difference between the rent paid by a new resident and the rent paid by the previous resident for the same unit. A positive trade-out indicates rent growth, while a negative one reflects a rent decline. In March, lease trade-outs throughout the industry hit 0%, meaning new leases were signed at the same rates as outgoing leases. This is a meaningful recovery from November 2024, when new leases were coming in 4% below prior rates—a period that marked the national low point in trade-out performance.

Importantly, the lease trade-out figure is not annualized. It reflects actual rent changes from one lease to the next—regardless of how long the previous resident stayed. As a result, many of today’s new leases are replacing contracts that were signed over a year ago, often during the peak of the pandemic-era rent boom. In some cases, those high watermark rents are now resetting closer to market norms.

Markets with elevated new supply—such as Austin, Phoenix, and Nashville—continue to face pressure, with year-over-year trade-out declines of 4% to 10%, according to recent reports. These oversupplied regions are still seeing new lease rents fall below those of departing residents. By contrast, six slower growth metros—Anaheim, Columbus, Kansas City, New York, Philadelphia, and Virginia Beach—have managed to maintain flat or slightly positive trade-outs throughout the downturn, a sign of a much weaker supply pipeline as new apartment developers focused their building over the last few years in markets with significantly higher employment and population growth.

Across Providence’s portfolio, we believe we’re beginning to see green shoots that may signal a strengthening rental market. New lease trade-outs have started to trend positive, and recent trends suggest leasing momentum is picking up as we move deeper into the summer. That said, it’s still too early to definitively call this a sustained market strengthening.

New lease trade-outs do not account for timing—such as when a lease rolls off a 2022 peak-pandemic rate spike. Therefore, we find it more meaningful to analyze annual trade-outs by comparing only 2024 leases that turned over in 2025. Using this approach, one of Providence’s portfolio’s average annual new lease trade-out through June was $23 above prior lease levels.

The increase in lease trade-outs points to improving health in the multifamily sector and offers cautious optimism for investors in residential rental housing.

Harvard’s 2025 Housing Report – Middle Income Renters Underserved

Harvard’s 2025 State of the Nation’s Housing Report reinforces the core of our value-add multifamily investment strategy: middle-income renters are increasingly underserved, and there is a widening gap between the rental housing that exists and what working Americans can afford.

Key Takeaways:

• Home Prices Continue to Rise
  • Home prices in the U.S. rose 3.9% year-over-year as of early 2025 and are up 60% since 2019, with the median price reaching $412,500—five times the median household income. Despite high prices, home sales fell to a 30-year low due to homeowners holding onto low mortgage rates. Inventory increased 20% year-over-year, helped by longer time on market and a 7% rise in new single-family starts. Builders adapted by constructing smaller, less expensive homes, with the median new home price falling to $420,300. New homes made up 16% of sales, the highest since 2005. However, future affordability may be threatened by rising interest rates and building costs.

• High Home Costs and Mortgage Rates Drive More Households to Rent
  • High home prices and elevated mortgage rates pushed monthly payments to a record $2,570 in 2024, pricing many renters out of homeownership. A buyer now needs at least $126,700 in income to afford a median-priced home—an amount only 6 million of 46 million renters meet. Downpayment costs also surged, with even minimal entry requiring nearly $27,000 in cash. As a result, homeownership fell in 2024 for the first time in eight years, especially among those under 35.

• Apartment Rental Demand is Surging
  • Rental demand is surging as fewer people can afford homeownership, with renter households increasing by over 1.2 million in 2023–2024. This strong demand has absorbed a historic wave of new multifamily supply, which reached a 40-year high in 2024 with 608,000 new units. Despite this, rent growth remained modest due to increased supply, though rents varied widely by market. However, affordable rentals have declined sharply, and most new construction has targeted higher-income apartment residents. Now, multifamily construction is slowing significantly, setting the stage for tighter markets and faster rent increases ahead.

Why This Matters for Value-Add Multifamily Owners and Operators:

• Value-add owners and operators can offer renovated, modern housing at price points well below replacement cost, making our product attractive to a growing, underserved renter base.
• Middle-income renters are increasingly priced out of both homeownership and new luxury apartments, creating durable, recession-resistant demand for updated workforce housing.
• By investing in energy efficiency and operational upgrades, we reduce the cost burden for residents while increasing property performance and resilience.
• New multifamily development is declining sharply, creating a supply gap that renovated existing stock is uniquely positioned to fill.

In short, Harvard’s research underscores what we’ve long believed: there has never been a more critical moment to preserve and modernize housing for the American middle class. Our strategy is both impact-driven and, we believe, well-positioned to deliver strong, long-term returns.

Middle-Income Renters’ Wages Outpacing Multifamily Rent Growth

For approximately 36 consecutive months, wages for middle-income renters have grown faster than effective multifamily rents. Since July 2022, wages—measured using a 25/20 trimmed mean (which excludes the top 25% and bottom 20% of individual wage changes to eliminate outliers)—have grown at an average annual rate of 5.2%, compared to just 1.8% annual rent growth based on CoStar’s 12-month rolling average of effective multifamily rents. This 3.3% gap has allowed middle-income renters to significantly improve their rent-to-income ratios.

The trimmed mean method provides a stable estimate of wage trends for the broad middle of the workforce—effectively reflecting the economic experience of the middle class. Combined with a cooling rental market due to elevated multifamily supply, these renters have benefited from stronger real income growth. With new supply levels now tapering, middle-income renters are entering a more favorable position to manage future rent increases as the market tightens.

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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