Our insights into current and expected market conditions give us great confidence in the outlook for rental housing over the next several years. These insights are gained through participation in trade organizations and interactions with fellow industry participants. This ongoing exchange of information keeps us abreast of market conditions and relevant government policy issues, helping us spot trends early.
While near-term performance will be challenging in 2025, as it was in 2024, I would like to summarize the factors that form the foundation of our mid- to long-term outlook and describe the causes of recent underperformance in the apartment market. In 2024, an estimated 650,000 apartment homes completed construction and were ready for occupancy in the U.S. – a number that hasn’t been reached since the mid-1970s. At the same time, apartment absorption (net new renter households) was well above historic levels, which kept apartment occupancy from falling significantly during this period of heightened supply.
Basic supply and demand economics were at work in the apartment market during 2024. The heightened supply kept a lid on rental growth and, although rental growth varied across the nation, rent was generally flat compared to 2023 and concessions (periods of free rent) to incentivize new rentals increased. At the same time, operating costs, particularly insurance and real estate taxes, increased faster than overall inflation. In 2025, new apartment home completions, though lower than in 2024, will once again be elevated above historic averages. Most estimates for construction completions this year fall in the 550,000 range. This will continue to depress rent growth through most of 2025.
It is widely reported that the U.S. faces a shortage of housing, with some estimates as high as a 4 million home shortfall. Because of this, one may wonder why apartment demand doesn’t always exceed supply, even in a year with such an uptick in construction completions. The creation of new households requires many ingredients that aren’t limited to the availability of housing units. Affordability is perhaps the greatest of these ingredients (and is a key reason why our brands focus on workforce-attainable apartments). When housing isn’t sufficiently affordable, would-be households often double up — sharing space with multiple roommates or living with family members for extended periods — due to an inability to afford their own apartment or house. Wage increases in the past two years have exceeded rent increases, making rental housing (but not home purchases) more affordable. This is a key contributor to recent apartment absorption and a positive development for future rental demand.
Interest Rate Increases and Valuation Impact
The joint condition of static rents and rising operating costs, along with higher mortgage interest rates, has also led to a decline in sales of completed apartment communities and a significant gap between asking prices from apartment sellers and the bids offered by apartment buyers. In general, valuations for apartment investments have experienced a decline of 10% to 20% in the past two years. At the same time, large institutional investors like Blackstone, KKR, and Apollo have made significant investments in the apartment industry in recent months with the stated position that current pricing offers value due to expected strong demand for rental housing during a period of low new supply in coming years.
Concerns over increased regulation of housing during the previous administration may have also dampened pricing for apartment investments. The change in administrations has raised expectations for less regulatory pressure and perhaps a relaxing of regulatory burdens that have raised the cost of building and operating apartment communities. On the other hand, tariff and immigration policies could have a detrimental impact on housing development and operating costs.
Apartment Investment Outlook and Development Strategy
The apartment industry can predict the supply of apartments two years in advance with a high degree of certainty. That is because in typical construction conditions, apartment community development takes two years from groundbreaking to completion. Construction starts this year will translate into completions two years forward. While completed apartment homes were at a 50-year high in 2024, new construction starts fell to a level not seen since 2014. In fact, the gap between completed apartment homes and new starts was the widest ever recorded. Data is not yet verified but estimates of new construction starts in 2024 are generally in the range of 300,000 apartment homes (exclusive of student and senior housing). This compares favorably to both recent demand levels and to historic demand averages. The increase in interest rates, slowdown in rent growth, increased development costs, and tighter lending conditions led to this dramatic reduction in future supply. Industry research anticipates that this year will see construction starts similar to 2024. If so, both 2026 and 2027 will see new apartment deliveries below the long-term average. At the same time, demographics (population in prime household forming years) in the U.S. indicate projected demand will exceed this supply.
Positioned for Growth Beyond 2025
In conclusion, 2024 was a very challenging year for apartment income and valuation due to the addition of significant new apartment supply, rising interest rates, and rising fixed costs. Supply will remain elevated in 2025 before dropping precipitously in 2026 and 2027. Demographics and current economic conditions support continued strong demand for rental housing. This will allow the industry to continue to absorb the elevated supply. We anticipate that pressure on rental income will remain in the near term, resulting in generally flat performance in 2025. In the second half of 2025, supply begins to drop off, which may provide an opportunity to recapture momentum in rent growth and earnings later in the year.
Barring any macroeconomic reversals, that momentum will gain strength in 2026 and 2027 when rents and occupancies are expected to rise. Rising rents and occupancies amid a reduction in new apartment supply bodes well for operating income. Value is based on current and future income expectations and, therefore, property values can be expected to rise in those years as well.
While interest rates may remain “higher for longer,” improved property income performance will support higher valuations even in the face of higher rates. Forecasts of rental housing demand outpace supply in 2026 and 2027, and we expect to see patient ownership and development rewarded at that time. In the meantime, operators are focused on maximizing property performance. A long-term view for apartment investment, coupled with strategic planning will position these investments for success.
