The recent national wave of new supply is fading, and renter demand has kept pace.
This February, CBRE Research reported that during the fourth quarter of 2024, net apartment absorption totaled almost 185,000 units, the highest fourth quarter total absorption since CBRE began tracking the metric in 1985. This amount of absorption was surprising considering that we added almost 600,000 new apartment units to the country’s stock in 2024, the most in 50 years. Surprisingly, most of that record supply was absorbed last year due to a solid U.S. economy that has thus far avoided recession.
Additional dynamics fueling apartment demand include rental rates that have remained relatively flat for the past 24 months due to the record levels of new supply. This has made renting more affordable as household incomes continued to climb during that time. Largely, residents of our apartments are financially resilient and are paying less of their incomes towards rent than they were two years ago. Apartment turnover is also well below its historical norms, supporting healthy occupancy heading into 2025. RealPage indicates that the percentage of renewed apartment leases averaged 55% in 2024, up from 53% in 2023. In fact, CBRE Research reports that today’s nationwide apartment vacancy rate is 4.9%, below its long-run average of 5.0%. From a national perspective, the apartment market is in balance.
Another major factor contributing to apartment demand is the relative unaffordability of the for-sale single family housing market. Rising home values have increased the wealth of homeowners but has also created a barrier for future first-time home buyers. This has strengthened resident retention within the apartment industry. According to Freddie Mac, only 27% of US households can afford a median priced home in the country, and the spread between the median priced monthly home payment and the average apartment rent is a record $1,200 per month. Renting an apartment is significantly more affordable than owning a home.
While apartment demand fundamentals are currently favorable, the industry still has its fair share of challenges. Rising property insurance costs are an impediment to growing cash flows. According to NMHC, nationwide multifamily insurance costs increased 26% year-over-year from 2022 to 2023. While the insurance market stabilized a bit in 2024, the damage from the recent Los Angeles-area wildfires is expected to total about $150-$250 billion. Those costs will result in increased premiums for property owners throughout the country in the years ahead.
Additionally, from a long-term perspective, our population is aging. Today, there are about 55 million people aged 65 and over in the United States. By 2040, it is projected that there will be about 80 million people aged 65 and older. Are we producing and maintaining the right housing for a changing demographic? We don’t prepose to know the answer to this pending demographic shift and the long-term effect on household creation, but it’s on our minds and merits continued attention.
Despite some headwinds, there are a number of reasons for optimism in today’s apartment market. Supply has peaked while asking rents have bottomed. Today’s high cost of capital and elevated construction costs will likely restrict new supply in the years ahead. Apartment deliveries in 2026 are expected to be less than half of what was delivered in 2024. Demand is strong and better times are ahead of us. Housing remains a necessary, non-discretionary expense. The overall lack of availability of single-family housing in the United States combined with the rise in interest rates have led to a propensity to rent. Since 2010, approximately 30% fewer total housing units have been produced vs. total households formed during the same period. Supply and demand dynamics are increasingly favorable for apartment owners.
While apartment market fundamentals appear favorable, there are unfortunately few opportunities to buy in the market right now. There are many would-be buyers in the market, but for prices that don’t exist due to stubbornly high long-term interest rates and owners unwilling to sell at today’s valuations. Fortunately, we’re about to experience a wall of commercial real estate loan maturities this year. According to the Wall Street Journal, owners are facing $1.5 trillion in commercial real estate maturities this year. About a quarter of these maturities are in distress, including $80 billion in troubled apartment loans. These distressed loans could create opportunities for buyers as owners facing financial pressure may be forced to sell. At some point, the dam will break. When it does, we will be ready to capitalize.
