The Commercial Real Estate Alpha Site

Another fantastic post from Jay Parsons chocked full of research and insights!

We’ll add more new apartment supply in the first half of 2024 than we did in most FULL CALENDAR YEARS over the last three decades, and yet demand is (almost) keeping pace?

Across multiple data providers, there’s a similar story playing out: Supply is way up, but occupancy rates are stabilizing – reversing course from 2022-23, when occupancy was falling fast. RealPage shows occupancy up a hair (10 bps) year-to-date in 2024, while Yardi reported occupancy has held steady for three straight months.

The chart below shows YTD supply versus occupancy change by year over the last decade– and you can see a counterintuitive trend emerging in 2024, with occupancy going up DESPITE the supply surge. (Note that this isn’t perfect math given nuances of how these metrics are calculated, but is a directionally useful gauge.)

Four things appear to be happening:

1: There appears to be A LOT of well-qualified new demand entering the market. RealPage data shows new resident household incomes at record highs, while rent-to-income ratios (among new lease signers) retreat back toward pre-pandemic levels thanks to income growth outpacing new lease rent growth for 16 straight months. The demand appears to be coming from traditional apartment demographics (younger adults benefiting from above-average wage growth) – so it’d be unfair to give too much credit to the stalled for-sale housing market.

2: Renter turnover is slowing down, especially in newer/pricier apartments that had been bleeding renters to concession-heavy lease-ups. Class A retention rates fell below 50% for much of 2023, but have since inched upward a bit.

3: Apartment operators continue to focus on occupancy and retention over rents, and it’s working. (I wrote often about this as a theme going into 2024, and it’s playing out even better than I thought it would.) Rent growth remains muted (or even negative) across most large markets across the country. Year-over-year effective rent change for new leases has held flat at essentially 0% for 11 straight months. Renewal rent growth has normalized to sustainable levels in the low/mid single-digits across much of the country.

4: Supply is doing what supply is supposed to do. It’s putting downward pressure on rents amidst a high-demand environment… but that story will change as we get into 2025-26, as the recent plunge in new starts gives way to a plunge in completions.

Bottom line is that apartment demand appears to be tracking well above most expectations so far in 2024, and that’s especially good news for operators in high-supplied markets.

I wouldn’t take this to assume an immediate turnaround in rent growth yet, but it’s another encouraging indicator that the apartment market (and renters!) is proving to be more resilient than given credit for.

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