More young people are forming their own households and moving into their own place, says a new … [+]
To the great relief of the rental development industry, demand for new rental homes (whether apartments, single-family homes, or townhomes) is proving to be extremely robust. The latest data make it clear. During the past six months, as a tremendous supply wave has crested, demand has shown up to absorb the lion’s share of it.
What does this tell us about the rest of 2024 and 2025/2026?
According to new data from CoStar, total unit absorption during the first half of 2024 came to 290,000, which (other than the stratospheric Covid-19-driven surge of 2021) is the strongest pace of absorption in decades. CoStar also notes that vacancy held steady at a modest 7.8% in the second quarter as demand sopped up 170,000 of the 180,000 new units of supply that came on line in that three-month period.
Source: CoStar, June 2024 data, Total U.S.
Confirming this, data from RealPage shows that in the four quarters ending 2Q 2024, nearly 400,000 market-rate apartment units were absorbed (on net), which they say is the 8th largest absorption figure on record. Even more persuasive is the fact that absorption so far this year is stronger than the same time periods of 2022 or 2023, debunking the notion that demand is continuing to soften post-Covid. Demand is, in fact, on the rise. Data from Yardi Matrix also confirm a surge in absorption in the first half, though their count is lower than that of CoStar and RealPage. Directionally, however, there is strong consensus that the vast majority of the new apartments are getting filled up with tenants quickly.
We continue to see very strong wage/income growth within the renter population. As one easily-visible component of this, the Millennials are now advancing in their careers, getting large promotions and raises, and starting their own businesses in some cases, leading to a pace of income growth that is far faster than the rate of wage growth in the general population, and (even more importantly) far faster than the current rate of rent increases.
Absorption has jumped in most markets. A few examples are shown here, comparing current (first half … [+]
I have often made the argument that “absorption” is on a proxy for “demand,” and it is an imperfect proxy. It fails to capture all demand because it is capped by the amount of supply delivered in a given year. Now that there has been a massive surge in deliveries, we have a much clearer picture of the level of actual demand. If the surge in supply had not been met by a huge surge in demand, the market would have been a bit of a trainwreck; fortunately, 2024 is not turning out as bad as it could have bee. Add to this fact the drastic pullback in multifamily construction starts, and we have even more conviction now that new rental deliveries are going to fall short of demand in 2026/27. Multifamily starts are less than half what they were one year ago, according to data tracked by the Census Bureau, and that represents the largest year-over-year drop since the GFC.
The strength of rental demand is being driven not only by a shift from the for-sale market (due to the surge in the cost of ownership driven by higher mortgage rates and insurance rates), but also a high rate of household formations, increased in-migration, the release of pent-up demand, strong renter income growth, and other factors. The surge in household formations is in turn being driven by renters leaving shared situations to get their own place. RealPage notes that the mean number of residents per new lease agreement through May 2024 is the lowest since 2016. This is powerful evidence that demand is strong and that this strength could be sustainable. RealPage notes that if the third quarter just puts in a “normal” performance, that the trailing 12-month figure will rise higher than the 400,000 mark, which was only recorded on one other occasion outside of the pandemic period.
Some developers spy a contrarian opportunity in multifamily development right now. This is evident in the volume of market due-diligence that is going on. We prepare site-specific market studies for developers of multifamily projects, many of whom are hoping to open into a lower level of new competition in the next two to three years, and the volume of market studies being ordered has remained strong even as starts have been cut in half. This is expected to be a leading indicator for new development in the next 12 to 24 months.
Capital is still scarce at the moment for new development projects, but given that our own market study pipeline remains full, and given that our clients are reporting that capital is coming back into the development market (albeit slowly and selectively), we see some interesting opportunities for well-located projects that may open for leasing in 2026 or 2027.
There has already been a surge of investment in built assets. KKR has just inked its largest-ever purchase of apartment buildings, amounting to $2.1 billion for more than 5,200 apartment units across the country. In April, Blackstone agreed to pay $10 billion for the landlord Apartment Income REIT, and last month Brookfield bought a portfolio of 7,000 apartments for $1.6 billion. KKR states, “even Sunbelt markets where supply is growing fastest should rebound quickly once supply slows.”
Right now the greater focus is on already-existing units, but I believe the next big thing in the residential sector is going to be development (in good locations) that is timed to fill an inevitable undersupply in 2026/27. The rental market is highly cyclical, and it is driven by a herd mentality, which means it always overdoes things on the upswing, and it also overdoes the corrections. Being a contrarian is viewed as being sticking one’s neck out, which means that only a select sub-group will zig while the majority are still zagging.
Source: www.forbes.com