Predicting the potential impact of economic change on commercial real estate has become a larger challenge than usual. On the multifamily front, RealPage has said that recent economic developments “reflected positively” on apartment demand. Absorption in the third quarter was more than 192,000 units. Year-to-date, that’s 488,000.
RealPage still expects strong demand to continue well into 2025, rising about 5% above the 2024 level.
But supply will continue high for the next 12 months. The firm expects more than 637,000 units to be delivered over the next 12 months. It expects the supply side will reflect the interest rate cut the Fed already delivered, and that the effects will continue into 2025. Any additional rate cuts would presumably have an additional effect.
It’s a tricky call. Inflation had been settling and then August job numbers came in, far lower than expected. “Cut, cut!” many in economics and investor roared. At the September meeting of the Federal Open Market Committee, it was a 50-basis-point reduction. Then people wondered whether things were as bad as they thought. Inflation dropped. September jobs were 254,000 instead of the expected 150,000.
In early October, Federal Reserve Chair Jerome Powell said, “This is not a committee that feels like it’s in a hurry to cut rates quickly. Ultimately, we will be guided by the incoming data. And if the economy slows more than we expect, then we can cut faster. If it slows less than we expect, we can cut slower.”
In one sense, a greater facility for building could damage the rental business. Many metropolitan areas have seen rent cuts because demand hasn’t been able to keep up with supply. Of the top 50 markets, 68% saw downgraded rent forecasts. Only 18% received increased forecasts. Next year, 30% of markets will get upgraded rent projections, but 42% will see downgraded forecasts. There won’t be market changes next year for 28% of top markets.
RealPage said that in 2025, 36% of the top 50 markets will see rent cuts in Q4. Half the markets will see rent growth but only 1% to 3%. A relative handful of markets will see rent growth of more than 3%. When supply is slowing next year, close to half of the top markets will see rent growth between 2% and 3%. More than 35% of them will experience rent growth above 3%.
Again, this assumes a relatively steady economic state including a degree of reduced inflation and a job market that will remain strong, which may or may not happen exactly.