The U.S. apartment market continued to defy expectations in the third quarter of 2024, demonstrating strong demand even as the market faced a wave of new supply. Despite the challenging economic environment, which includes persistent inflation and rising interest rates, the multifamily sector showed resilience. The market absorbed 192,649 market-rate apartment units between July and September, a testament to the enduring demand for rental housing across the country.
However, this impressive demand was still outpaced by the sheer volume of new units being delivered. In Q3 2024, the U.S. apartment market added 162,595 units to the housing stock, contributing to an annual supply of 557,842 units, a rate unseen in 50 years. Not since 1974 has the market witnessed such a deluge of new apartment completions. Yet, despite the scale of new deliveries, the gap between supply and demand is narrowing. The difference between annual supply and demand now stands at just over 69,000 units — the lowest point in two years.
This confluence of rising demand and near-record supply has shaped an intriguing dynamic in the U.S. multifamily sector, especially when viewed through the lens of rent growth, regional differences, and future construction trends.
Rent Growth: A Mixed Bag
With the influx of new supply, rent growth has been largely muted nationwide. The average rent for market-rate apartments in the U.S. stood at $1,838 as of September 2024, reflecting only modest gains over the past few quarters. While nationwide occupancy remains relatively strong at 94.4%, this is down slightly from the year-ago figure by 10 basis points.
Despite this overall stability, regional disparities in rent growth have emerged, with the Midwest showing a clear outperformance. Cities such as Kansas City, Milwaukee, Detroit, and Cleveland have seen above-average rent growth compared to the national average, largely due to limited new supply in those regions. Kansas City, in particular, led the nation in annual apartment rent growth, driven by a balance between manageable new supply and sustained demand.
In contrast, markets like Austin, Phoenix, and Raleigh/Durham, which have experienced significant new supply growth, have seen notable rent cuts. Austin, for instance, has seen its total apartment inventory grow by 8.9% in the past year with 27,000 new units delivered and another 26,000 expected over the next four quarters. Unsurprisingly, this has led to rent cuts of 8.1% in Austin, making it the deepest rent decline in the nation. Other supply-heavy markets, including Jacksonville, San Antonio, and Atlanta, have also seen rents decline by more than 4%.
Midwest Markets: Outpacing National Trends
The Midwest stands out as a region bucking the national trend of rent deceleration. Several major markets in this region have experienced rent growth that far exceeds the national norm. Cities like Detroit, Chicago, Indianapolis, and Cincinnati are among the top performers in the country, consistently posting rent growth above the U.S. average.
This growth can be attributed to a combination of factors. First, many of these cities have seen more limited new supply compared to high-growth markets in the Sun Belt and West Coast. The relative lack of new construction has helped sustain demand for existing units, pushing rents higher. Second, many Midwest markets offer affordability compared to their coastal counterparts, attracting renters looking for more affordable living options in a time of high inflation and economic uncertainty.
However, even in the Midwest, there are outliers. Madison, Wisconsin, and Sioux Falls, South Dakota, have seen their rent growth slow significantly over the past year due to a spike in new apartment deliveries. These markets serve as a reminder that even in regions with typically robust demand, a sudden influx of new supply can temper rent growth.
The Record-Breaking Supply Surge
The third quarter of 2024 saw an annual supply of new apartment units that reached a 50-year high. A total of 557,842 new units came online in the 12 months ending September 2024, reflecting the ongoing efforts of developers to address the nation’s housing shortage. However, this supply surge also poses challenges, particularly for markets already experiencing high vacancy rates and rent deceleration.
Nationwide, the apartment vacancy rate stood at 6.4% in Q3 2024, up from 4.6% a year earlier. While demand remains strong, the sheer volume of new units entering the market has made it more difficult for landlords to maintain high occupancy levels and push rents higher. This is especially true in markets like Austin and Phoenix, where new supply has flooded the market in recent years.
While demand continues to absorb a significant portion of the new units, the scale of construction means that landlords are often forced to offer concessions or lower rents to attract tenants. The result is that while demand remains robust, rent growth has slowed significantly, and in some cases, rents are declining.
A Changing Construction Landscape
As we look to the future, it’s clear that the era of record-breaking apartment construction may be coming to an end. The pipeline of new apartment units is expected to shrink dramatically over the next few years. Currently, there are about 762,000 apartments under construction in the U.S., with 550,000 of those units expected to be completed by the end of Q3 2025. However, only 40,000 units began construction in Q3 2024, indicating that fewer new projects are being initiated.
If current trends continue, fewer than 210,000 new units will be delivered in 2027, a sharp decline from the 2024 peak. While this slowdown in new construction may help alleviate some of the pressure on rents in oversupplied markets, it also raises concerns about the long-term availability of housing, particularly in markets already struggling with affordability issues.
Lowered interest rates could spur a resurgence in construction activity in the coming years, but for now, the pipeline is set to empty rapidly. This shift in construction dynamics could mark a turning point for the multifamily sector, as developers and investors recalibrate their strategies in response to changing market conditions.
The U.S. apartment market in the third quarter of 2024 reflects a complex interplay between strong demand and a record-breaking supply surge. While robust demand continues to absorb a significant portion of new units, rent growth remains muted, and in some markets, rents are declining. As the construction pipeline begins to shrink, the balance between supply and demand may shift once again, offering new opportunities and challenges for investors.
For now, the multifamily sector remains a resilient asset class, but investors will need to stay attuned to regional differences and future shifts in construction activity to navigate this evolving landscape effectively.
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