Main Takeaway: In the short-term, apartment demand is easing due to weak leasing data in Q3 (generally a busy season). That said, given homeownership affordability hurdles, high demand, and a pipeline of new construction not projected to keep up, demand for apartments in the long-term appears to be robust.
Story: According to new data from RealPage, apartment demand is decreasing. Leasing traffic dropped significantly as of Q3 2022, pushing net apartment demand negative at -82,095 units. RealPage concludes that apartment demand has unexpectedly evaporated in what appears to be a freeze in household formations. Notably, this was the first time in 30 years that RealPage registered negative apartment demand in a Q3 period, which is generally a busy leasing season.
Despite this, the apartment market is strong with vacancy still sitting at record lows at 4.4%. So what is the cause of this softening of demand? RealPage concludes that:
Soft leasing numbers coupled with weak home sales point to low consumer confidence. Inflation and economic uncertainty are having a freezing effect on major housing decisions. When people are uncertain, human nature is to go into ‘wait and see’ mode. Net new housing demand is dependent on household formation – which drove the 2021 housing surge but appears to have frozen earlier this year.
Similar to RealPage above, as well as notes from the latest Fed Beige Book, Yardi Matrix also found that lease renewals were weakening significantly in the short-term.
National lease renewals continued to slide from the 68.0% peak in the fourth quarter of 2021, to 60.2% in September, which points to weakening demand and decreasing affordability levels. Leading ranks were Philadelphia (73.8%), Kansas City (67.9%) and Baltimore (66.9%), and lowest ranking metros were Los Angeles (41.6%), San Francisco (43.1%), San Jose (43.9%) and Seattle (50.2%).
That said, over the long term, apartment demand looks strong according to multiple industry reports. The National Multifamily Housing Council (NMHC) released its U.S. Apartment Demand Through 2035 report this past summer which contains several key takeaways for multifamily owners and investors. This report concludes that:
- Currently, NMHC estimates another 600,000 units are needed to bring the 5+ rental back to equilibrium because of underbuilding due to the financial crisis.
- Overall, demographic growth is expected to generate demand for another 3.7 million new rental properties with 5 or more units through 2035.
- There is hesitancy in the younger population to embrace homeownership which will drive up apartment demand.
- Regionally, new demand through 2035 is focused in just three states, Texas, Florida, and California, which will require more than 1.5 million new housing units, or 40% of net new demand.
RentCafe recently projected that 420,000 new apartment rental units are to be completed in 2022, pushing construction to a record 50-year peak. What is the reason for this increased construction pipeline? Demand for apartments is increasing, and will continue to do so.
According to Yardi Matrix, the rise in interest rates has been a double-edged sword for apartment demand with construction debt getting more expensive and slowing down permits and starts, but at the same time keeping those who can’t afford a home purchase renting longer. Expect this trend to continue into 2023.
Expert Take on Apartment Demand
“For a sign of how fast and deep annual rents have fallen thus far in 2022, Las Vegas and Phoenix are striking examples. Almost a year ago, both of these markets were recording rents up 20% and today, they are just barely positive. With a potential recession looming in the first half of 2023, the current mismatch between supply and demand appears likely to widen even more. Therefore, the downward pressure on rents appears likely to continue across the nation, but especially in over-supplied Sun Belt markets.” — CoStar