Housing's Battle of Demand Versus Affordability

Cushman &Wakefield recently released its mid-year housing outlook, and the news is complicated.

The firm said that “strong demand across various housing sectors is continuing to fuel growth.” But that is only half the story, as “persistent inflation continues and ongoing moderation in overall economic and labor conditions is impacting affordability.”

“Cracks are forming beneath the surface, as consumers and businesses remain under pressure from the cumulative effects of higher interest rates and inflation,” said Cushman & Wakefield Deputy Chief Economist and Global Head of Forecasting Rebecca Rockey in prepared remarks.

The big influx of construction and added multifamily inventory helped fuel a vacancy rate growth from 5.1% in mid-2021 to 2024 Q1’s 8.7%. “Our baseline forecast calls for vacancy to peak at the end of this year at 8.9%, before adjusting lower to 8.3% in 2025 and 7.3% in 2026,” they wrote.

Market conditions and difficulties in financing are slowing multifamily growth. Construction permits in the first quarter of 2024 are 38% off from their pandemic peak. Record numbers of new units brought online in 2023 are expected to increase by half in 2024, as GlobeSt.com has previously reported. However, the roughly 400,000 units in 2024 should be cut by half in 2025.

“While it will take several quarters for these new units to be leased, demand is clearly on a solid trajectory as evidenced by the first quarter, where the 85,900 units absorbed was the strongest in two-and-a-half years and the second highest first quarter total on record,” said Sam Tenenbaum, Americas Head of Multifamily Insights at Cushman.

Tenenbaum also noted that build-to-rent has “outperformed nationally” because 40-to-49-year-olds will increase by 10% by the end of the decade and the cost of buying a home increases demand for the BTR market segment.

The firm also says that forecasts for the student population will near 20 million by the end of the 2020s. “Student housing assets have outperformed the broader multifamily market over the past few years, thanks to strong enrollment growth across most top-tier student markets which far outpaced a diminished development pipeline, with an approximately 40% decline in current and projected deliveries from the previous five-year average,” says Travis Prince, Cushman & Wakefield’s executive managing director of student housing capital markets.

Finally, senior housing has growing importance because the number of people older than 75 will expand by half in a dozen years. “Occupancies have fully recovered from pre-pandemic levels and rent growth remains strong in almost all U.S. markets,” said Zach Bowyer, executive managing director and head of living sectors. The country will need another 35,000 to 45,000 units of new supply annually through 2045. The current pace is 25,000.