Apartment Supply to Thin Out Dramatically After This Year

It has been 36 years since the U.S. had so many apartments available for rent, according to a new RealPage report. And the effect has been predictable: rents have fallen in markets where there has been the most growth, even though demand has rebounded.

Indeed, in 4Q 2023 —a traditionally slow quarter – 58,000 apartments were absorbed. It was the strongest fourth quarter in 25 years, excluding 2020 and 2021. Even so, it was 11,000 below the average since 2000.

For 2023 as a whole, 234,000 units were absorbed – a figure closer to pre-Covid norms, the report stated. Completions totaled 440,000. That boosted supply to the highest levels since 1987 and pushed apartment occupancy down 80 basis points year-over-year to 94.1% — still within the long-term normal range.

Demand was driven by cooling inflation – including lower rents – and improved consumer confidence, the report noted. “Renters suddenly have far more options than they’ve had in recent years, and that’s putting downward pressure on rent growth,” said chief economist Jay Parsons.

Effective rents scooted up just 0.3% in 2023. Fortunately for investors, that level appears to have stabilized, ending a downward trend. However, the report noted, “One big question for 2024 is whether rents nationally will continue to hold flat as completions accelerate. Another 671,000 are scheduled to complete in 2024, after which supply should thin out dramatically.” If that happens, it should enable occupancy and rents to climb in 2025 and 2026.

As in previous reports, RealPage found a clear link between the number of apartments available for rent and rental rates. Some 40% of U.S. metro areas saw rents slide, particularly where supply grew. This was especially true in the Sun Belt and Mountains, which together accounted for 70% of national apartment demand and where 62% of the new apartments were built. On the West Coast, only Seattle ranked high in apartment demand. For the region as a whole, where 10% of the nation’s new apartments were built in 2023, new demand rose only 4%.

“In these ultra-high supply areas, we’re seeing the impact to rents even in the Class B and Class C space,” commented Carl Whitaker, RealPage’s senior director for research and analysis. Six metros in Florida wound up in the nation’s top 10 for rent cuts in 2023. Other steep drops of four to six percent occurred in Austin, Boise, Atlanta and Phoenix.

In contrast, one-third of metros, mainly in the Midwest or Northeast, which saw little construction, enjoyed rent growth of 3% or more. In these regions, only two metros experienced rent cuts.