Apartment Industry Outlook: A Shift Towards Recovery
As the apartment industry navigates the challenges of 2024, executives are looking towards 2025 with a mix of caution and optimism. The past year was marked by rising capital costs and surging deliveries, particularly in the Sun Belt, making survival a top priority.
A Tough Year for Rent Growth
According to Redfin, the median asking rent fell 0.7% year over year and 1.1% from October, while the asking price per square foot for rental apartments dropped 2.2% year over year to its lowest level since December 2021. Jon Siegel, co-founder and chief investment officer at RailField, described 2024 as a “flat year if you’re lucky.”
A Transitional Year Ahead
Despite the market softness, Siegel believes 2025 will be a transitional year, with 2026 marking the beginning of an upcycle. The good news is that demand for apartments remains strong, particularly in markets with low supply.
Peak Deliveries Passed?
The consensus among executives is that the peak of new apartment openings occurred in the second half of 2024, although the timing varies by market. Ryan Davis, CEO of Witten Advisors, expects new deliveries to fall by only about 20,000 units in 2025, while others anticipate a continuing surge of new competition.
Supply-Demand Dynamics
By late 2025 into early 2026, deliveries are expected to fall dramatically, leading to an improved vacancy and concessions picture. Jay Parsons, head of investment strategy at Madera Residential, believes 2026 will be an above-average year for rent growth.
Record-High Demand
Despite record-high Q3 supply, apartment owners were able to survive 2024 due to record-high demand. Employment growth continues to surprise to the upside, and income growth has outpaced consensus expectations, leading to more than 450,000 newly delivered apartment homes being absorbed nationally during the first nine months of the year.
High Interest Rates Boost Rental Demand
High interest rates have made homeownership more expensive, boosting rental demand. In AvalonBay Communities’ coastal markets, the spread between renting and owning a home is the widest company executives have seen.
Strong Demand Ahead
In 2025, executives expect strong demand to support revenue growth, particularly in established coastal regions where rent-to-income ratios are currently about 10% below where they were at the beginning of 2020.
Economic Uncertainty
However, economic issues could impact demand, and executives are keeping a close eye on job and wage growth. Joe Fisher, President and Chief Financial Officer of UDR, described jobs and wages as the “wild card” for the year.
Sun Belt Challenges
In Sun Belt markets with high supply, it could be challenging even with fewer new deliveries than in 2024. Mark Parrell, CEO of Equity Residential, doesn’t expect a recovery in same-store revenue in the REIT’s Sun Belt expansion markets until 2026.
Coastal Markets Look Promising
In contrast, coastal markets are expected to perform better, with new deliveries forecast to be 1.4% of existing stock in 2025, roughly 100 basis points lower than what’s forecast for the Sun Belt. Return-to-office policies from major employers like Salesforce are also expected to drive coastal performance.
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