Apartment demand remained strong during the first quarter, with more than 145,000 units absorbed, which significantly outpaced the new supply of 116,000 units. As a result, the vacancy rate retreated to its lowest level since the fourth quarter of 2022, at 5%, said John Chang, national director of research and advisory services at Marcus & Millichap.
“It's important to note that apartment construction has been at a record high, delivering over 1 million new apartment units over the last 24 months,” said Chang in a research video. “So the current pace of absorption is exceptional.”
Chang outlined three forces driving outsized apartment demand, starting with a healthy broader economy, low unemployment and steady job creation. Multifamily also benefited from positive demographic trends. Millennials remain in the rental housing market longer than past generations, while Gen Z is now coming of age, moving out, and forming new households.
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Finally, the affordability gap between renting and purchasing a home continues to support strong apartment demand, he said. The median home price is more than $420,000, and monthly house payments are compounded by higher mortgage rates, which have pushed the median monthly payment to about $3,163. That is well above the average monthly apartment rent of $1,827.
“While average rents have increased substantially over the last five years, up by about 27%, the payment on a median-priced home has nearly doubled, climbing by about 91% in that same time,” said Chang. “That affordability gap and the comparative value of renting, as opposed to purchasing a home, has helped bolster the national apartment lease renewal rate to 55% well above the long term average of 53% over the past 10 years, and that's a dynamic that's unlikely to change in the near future.”
Even if mortgage rates drop and spur increased demand for homeownership, that surge and a slowdown in housing construction would likely put upward pressure on home prices, noted Chang. New single-family housing construction fell in March due to higher construction loan costs and rising materials and labor costs. This indicates a sustained housing shortage that will increase home prices and apartment rents.
Meanwhile, multifamily construction has begun to taper. Although a healthy 410,000 apartment units are expected to be completed this year, the pace of deliveries will fall off quickly as new multifamily starts have fallen to their lowest level since 2011.
The impact of tariffs on building materials, especially softwood lumber from Canada, could continue to limit new housing construction. Chang said he expects housing demand to remain positive long-term, but noted a significant decline in consumer sentiment could weigh on household formation. However, over the long term, multifamily demand should remain robust, according to Chang.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
