U.S. apartment investment opportunities expected to remain robust amidst sector recovery

The U.S. apartment sector is well-positioned to capitalize on shifting sector dynamics, creating potentially long-term opportunities within the market. Below, we examine what factors are driving these changing conditions, and where investors may find value.

The pullback in construction bodes well for future fundamentals

The U.S. apartment market experienced the greatest supply growth on record in 2024. The onset of new supply challenged apartment operators’ ability to grow rents and maintain occupancy above the sector’s long-term average. Our research analysis of supply and rent growth data from RealPage Market Analytics indicates markets that experienced supply growth of 3.0% and below averaged 2.2% rent growth in 2024. Conversely, markets that experienced supply growth above 3.0% averaged -1.6% rent growth in 2024. In other words, markets with higher-than-average supply growth, saw rents fall.

Figure 1 illustrates the adverse impact new supply had on apartment operators’ ability to grow rents in 2024. While disruption to fundamentals was anticipated, we view the current supply pressure as a short-term headwind.

Tracking apartment construction starts prepares owners and operators for future supply pressures in the market. The outsized number of apartment unit starts in 2022 led to peak apartment market deliveries in 2024, which the market awaited.

In our view, the recent drop in apartment starts will be a secular tailwind for the apartment market over the medium term. Apartment starts continue to decelerate from 2022’s peak. In late 2024 they fell below the quarterly long-term average of 61,655 units. (Figure 2). Consequently, apartment deliveries will be subdued over the medium term relative to the last two years. As a result of relatively lower new supply in the years ahead, we expect apartment fundamentals to continue to improve.

Homeownership challenges prolong rental interest

Demand for rental housing, particularly apartments, accelerated throughout 2024. Last year, the apartment market absorbed 667,000 units, above the 589,000 units that delivered. Our analysis of historical absorption data from RealPage Market Analytics indicates that throughout 2024, each quarterly demand figure was at least 40,000 units above its quarterly long-term average going back to 2000 (Figure 3).

We expect apartment demand to remain favorable over the medium term. In our view, for-sale affordability headwinds will provide a buoy for apartment demand in the medium term, particularly in the form of resident retention. The apartment market exhibited stronger resident retention in 2024 than 2023. The retention rate for conventional market rate apartments in 2024 averaged 54.5% compared to 53.0% in 2023.

We foresee financial headwinds to homeownership to persist in 2025 and beyond, particularly for renters seeking to purchase their first home. Cumulative home price appreciation and rising mortgage rates since 2020 mean the cost to own a home has increased 79% vs 17% for incomes.

The millennial cohort, comprised of those born between 1981 and 1997 (currently 29 to 44 years old), totals 73 million people. This sizable generation continues to age into traditional first-time homebuying years. However, potential homebuyers are facing a skewed cost to own versus rent calculation. It is 68 % more expensive per month to own a home than rent an apartment, compared to the historical average of 27% more expensive. Consequently, the median age of first-time homebuyers has risen to an all-time high of 38 years old, according to the National Association of Realtors.

Further, the first-time homebuyer cohort’s share of overall home sales has dropped from 32% in 2023 to 24% in 2024, the lowest share since data collection commenced in 1981. Aside from for-sale affordability headwinds, the societal shift of adults delaying traditional life events such as marriage and having children has contributed to delaying homeownership. In fact, the delaying of traditional adult milestones has increased the share of one-person households from 23% in 1980 to 29% in 2024. We believe the delaying of these milestones extends rentership years and bodes well for longer-term rental housing demand.

Garden and low-rise apartments in focus

Middle-income households will continue to drive demand for rental housing for the foreseeable future. Targeting apartments that serve middle-income renter households, like garden and low-rise apartments, can provide investors with favorable investment outcomes.

Historically, apartments targeting middle-income renter households have performed well. Our analysis of apartment subtype performance data from NCREIF indicates that overall total returns have been stronger in the garden and low-rise segment of the market than in the high-rise segment (Figure 4). Over the last five years, garden and low-rise apartment total returns out-performed high rise apartment total returns by 471 basis points (bps).

Supply has been a focal point throughout 2024 as the market experiences peak supply pressure, but it is worth bifurcating by apartment subtype. Respectively, garden and low-rise apartments registered stronger average rent growth than high-rise apartments over the last five years (4.4% vs. 2.3%).

Given the relatively low supply growth of garden and low-rise apartments, this market segment is well-positioned to exhibit favorable performance going forward, being less affected by new supply pressures. Over the last three years, suburban counties have benefited from stronger population growth than urban counties. This trend is an additional tailwind for garden and low-rise apartment demand as these properties are typically located in non-urban areas. We view garden and low-rise apartments as a favorable segment of the market for future investments.

Shifting conditions are supporting U.S. apartment sector

The U.S. apartment sector is experiencing shifts which are combining to present an attractive environment for investors. Subdued construction, alongside barriers to homeownership and other societal changes in traditional life events are driving demand for rental housing. We believe that even if apartment starts rise in the near future, demographic trends will support the U.S. apartments sector in the long-term.