The apartment market has been bumpy over the past couple of years, facing many challenges, including rising interest rates, fluctuating capitalization rates and values, increasing operating costs due to supply chain disruption and inflation, and a wave of unprecedented deliveries of new apartments. These factors led to increasing vacancy rates, flat to negative rent growth in some markets and the widespread use of concessions to fill empty units. As we look to 2025 and beyond there is a growing feeling that the apartment market is on the brink of a robust recovery. Here are five factors that support that thesis:

1. Increasing demand coupled with reduced supply leads to stabilizing market fundamentals:

New apartment supply peaked in the third quarter of 2024 with 162,000 units delivered (3Q24 Newmark Unites States Multifamily Capital Markets Report). Apartment demand in the third quarter of 2024 reached 193,000 units, representing six quarters of accelerating growth and a 135% year-over-year increase, which more than offset the new deliveries. New apartment deliveries are expected to significantly slow in 2025 with quarterly deliveries expected to be below 50,000 units starting in 2026. Demand outstripping supply is a strong reversal from 2023 conditions and has led to strengthening market fundamentals, including a reduction in vacancies, strong projected future market rent growth and tightening of concessions (used as an incentive to lease vacant apartments).

2. High cost of homeownership:

In today’s environment, renters don’t have many options.  Nationally, the cost of homeownership (as of the third quarter of 2024) is 65% higher than the cost of renting, which is one of the highest differentials on record. The high cost of homes and rapid rise in mortgage interest rates are fueling renter demand. The average rate on all outstanding home mortgage debt in the U.S. as of the third quarter of 2024 was approximately 4.0%, while a new mortgage would be about 7.0%. This causes fewer existing homeowners to move, resulting in fewer resale homes on the market. In fact, home sales remain 35% below the fourth quarter of 2020 peak, and 19% off the long-term average. Additionally, there are fewer new homes being built to add to existing supply. This restricted supply of for-sale homes has left the typical move-up renter with very limited options, besides continuing to rent.

3. Stable economic conditions:

Inflation hurts. I picked up a Greek salad at my favorite quick service restaurant last week, and it was $22. Sure, I went for a side order of pita bread and added chicken, but I could’ve sworn it was $12 last week (not quite, but it amazes me how expensive some things have gotten). Notwithstanding the issues with inflation, the economy appears to be on solid footing. The unemployment rate is 4.1%, real gross domestic product (GDP) increased at an annual rate of 2.8% in the third quarter of 2024 and the S&P 500 index is up roughly 25% year-to-date. While fears of a recession threatened in 2023, the economy has shown its resilience with consistent job growth and steady consumer spending – maybe the elusive “soft landing” is within reach. Important to note for apartment owners, wages have been growing faster than rents. Nationwide year-to-date wage growth through October was 4.6%, while apartment rents have only grown 1.1% (CoStar). More money in renters’ pockets, coupled with constrained new apartment supply over the next few years, and a challenging for-sale housing market, may all be setting the stage for significant future apartment rent growth.

4. Regulatory environment:

No political commentary, just the facts. One of the items that Biden, and then Harris, campaigned on was national rent control, which would have been enforced by eliminating the deduction of interest expense for owners of apartment properties not in compliance. Not a real threat because it never would have passed but an unhealthy and divisive issue on which to campaign. For the third time in six years, rent control failed miserably in California, and with the passage of Proposition 34 it hopefully will not be seen on the ballot in any near-term elections. (Rent control was not on any other states’ ballots this election cycle.) John Q. Public seems to understand what all the experts, economists, and studies have long said and shown, which is that the road to more affordable housing runs through increased supply, not through caps on rents (which discourages owners from investing in the upkeep and maintenance of existing properties and developers from building new housing, exacerbating the affordable housing problem.) Enough said.

5. Capital markets:

The capital markets for multifamily have remained healthy and resilient. Interest rates have bumped around, but lenders have remained active providing liquidity to owners, with the Government Sponsored Entities (Fannie Mae and Freddie Mac) leading the charge. Multifamily debt originations through September are up 8.5% over the same period in 2023. There is also plenty of equity to take advantage of market conditions – there is roughly $326 billion in “dry powder” in private equity closed-end funds on the sidelines, which helps provide a floor for apartment values. Some of the “smart money” has already been put to work, with notable transactions like private equity firm KKR acquiring a $2.1 billion multifamily portfolio from Quarterra (Lennar) at a shockingly low 4% capitalization (“cap”) rate and Blackstone’s $10 billion acquisition of the apartment REIT AIR (formerly Aimco).

The apartment market feels like it is at an inflection point. It took a couple of good punches in 2023 and 2024 and should come out swinging (and strong) in 2025. The groundwork has been laid with limited new supply ahead, strong continued renter demand and stable economic conditions, which should lead to more of a landlord’s market over the next few years.

Scot Eisendrath is Managing Director of Pathfinder Partners. He is actively involved with the firm’s financial analysis and underwriting and has spent more than 20 years in the commercial real estate industry with leading firms. He can be reached at seisendrath@pathfinderfunds.com