High Apartment Supply Still Muting Performance Fundamentals

The commercial real estate market, particularly in the apartment sector, is experiencing a unique period of dynamics as of the first quarter of 2024. Despite a recovery in apartment demand, which is now 20% higher than the typical annual absorption rate of the 2010s, an even greater supply of apartments is impacting the market. In the first three months alone, the U.S. saw the completion of 135,652 apartment units, contributing to an annual total of 479,367 new multifamily units. This represents the highest annual supply figure since 1986, albeit the current expansion rate of 2.5% remains lower than the 3% rate experienced then.

This imbalance between supply and demand has led to only slight rent growth and steady occupancy rates. As of March 2024, rent growth for professionally managed apartments was nearly stagnant, with a modest increase of just 0.2% year-over-year, mirroring the rate from February. This trend suggests that rent growth may remain subdued throughout the year. Occupancy rates have remained stable at around 94.1%, close to the long-term average, indicating that while the market is not severely impacted, it’s not thriving either.

Market performance varies significantly by region, with supply levels largely dictating the pace of rent growth. Markets with lower annual inventory growth have seen faster rent increases, while those with significant new supply are experiencing downward pressure on rents. The Midwest and Northeast are seeing historically normal rent growth, whereas the South faces challenges due to high supply. The West presents a mixed picture, with coastal areas facing different challenges than inner markets.

For commercial real estate investors, these conditions suggest a cautious approach, especially in markets with high new supply. Opportunities may exist in regions with constrained supply, where demand continues to outpace new apartment deliveries. Investors should closely monitor market dynamics, including demographic trends and job growth, to identify areas with the strongest potential for rent growth and stable occupancy.

Our take (from the Straight to Smart newsletter):

Dueling Job Narratives

Article Excerpt:

Despite apartment demand recovering to stand above normal levels in 1st quarter 2024, even heavier supply continued to weigh down rent and occupancy figures.

In the first three months of 2024, the U.S. absorbed 103,826 apartment units on net, according to data from RealPage Market Analytics. That strong quarterly tally brought annual demand to stand at 317,241 units absorbed in the year-ending 1st quarter 2024. That rate registered about 20% higher than a typical annual absorption rate from the 2010s decade.

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