Demand for Apartments in 2024 Off to a Strong Start

2024 could potentially see one of the strongest years for apartment market absorption in recent history.

Jordan B. & Han-Gwon Lung
April 15, 2024

Together with

Good morning. The first quarter of 2024 witnessed a strong rise in apartment demand across the nation. Meanwhile, the U.S. warehouse market is showing signs of cooling.

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Market Snapshot

S&P 500

GSPC

5,123.414

Pct Chg:
-1.46%

FTSE NAREIT

FNER

701.17

Pct Chg:
-1.01%

10Y Treasury

TNX

4.56%

Pct Chg:
+0.061

SOFR

1-month

5.32%

Pct Chg:
0.0%

*Data as of 4/12/2024 market close.

MULTIFAMILY TRENDS

Putting 1st Quarter 2024 Apartment Demand in Perspective

Q1 of 2024 saw a rise in apartment demand across the U.S., marking a promising return to seasonal norms, as reported by RealPage Market Analytics.

What happened: Absorption soared to over 103,800 units from just over 49,000 in the previous quarter, marking a stark contrast to the subdued behavior observed during the 2021-2023 period, which was influenced by the COVID-19 pandemic. Historically, the first quarter has not been the peak period for apartment demand, typically accounting for only 4% of annual absorption. However, the early months of 2024 have deviated from this trend, with demand doubling the decade’s average and significantly outpacing the end of 2023

Rent growth: In Q1 2024, while the national median asking rent edged up for the third straight month, the addition of 135,652 new apartment units outstripped demand, moderating rent increases and occupancy rates. This marked the highest annual apartment supply since 1986, although the expansion rate remains below the peak levels of that year says RealPage.

Regional performance: The introduction of new units is impacting different regions unevenly. In the Midwest and Northeast, where new supply has been more restrained, rents have seen upward trends. For instance, the Midwest reached a new high, with median rents climbing 5.3% to $1,456. In contrast, the South and West, where new apartments are more prevalent, have experienced stable or slightly declining rents.

Economic trends: The demand for apartments is supported by various factors, including continued wage growth—which has surpassed rent increases for 16 consecutive months—robust job growth and strong demographic trends. Additionally, there has been a notably low level of transitions from apartments to single-family homes since the Great Financial Crisis.

➥ THE TAKEAWAY

Looking ahead: Q1 saw record-breaking apartment completions, with approximately 135,600 units finished, the highest volume recorded for a single quarter. While necessary to meet growing demand, this growing supply also creates competitive pressures on rent and occupancy rates. Given the impressive absorption rates and continuous supply growth, 2024 could potentially see one of the strongest years for apartment market absorption in recent history.

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✍️ Editor’s Picks

Reality check: Contrary to expectations of declining interest rates in early 2024, which owners hoped would be a financial reprieve, the Fed may not reduce rates soon. Here’s what it means for CRE.
Proptech: In 2023, proptech transactions hit their lowest since 2017, with $2.9 billion in value, despite a late surge in venture capital deals totaling $2.7 billion.
Vision loading: Adam Neumann discusses his billion-dollar initiative to revolutionize apartment living and why he wants to repurchase WeWork.
Fallout: Elie Schwartz has not fulfilled promises to repay hundreds of crowdfunding investors involved in two failed real estate deals, where he is alleged to have misappropriated $50 million.

🏘️ MULTIFAMILY

Housing heat: New York lawmakers’ proposed housing deal, including a new 421a program and modified eviction rules, has sparked strong reactions from both landlords and tenants.
Webinar: The Calvera Income and Growth Fund is under contract for its first acquisition, 27TwentySeven Apartment Homes. Register for the webinar to receive the deal summary and CIGF materials. (sponsored)
Kicking off: Pinnacle has started construction on Pinnacle at La Cabaña, a 110-unit affordable senior housing project in Miramar, Fla., with completion targeted for 2025.
Refinance: Tidal Real Estate Partners secured a $120 million loan for their 380-unit Nashville complex, overcoming a tough lending climate.
More multifamily: Hillwood is set to expand the Frisco Station development with a new 410-unit apartment complex near The Star in Dallas.
Acquisition: AEW Capital Management purchased Ranch at Moorpark, a 376-unit multifamily community in Moorpark, Calif., from Decron Properties for $133.2 million.
SCALE lending: The Beitel Group obtained a $150 million loan from SCALE Lending for a 450-unit multifamily development in the Bronx, N.Y., with completion anticipated by mid-2025.

🏭 Industrial

Cold storage: A report from Marcus & Millichap highlights how changes in consumer shopping habits, particularly for food, are driving the demand for cold storage facilities across new markets.
Leasing surge: NYC’s industrial market kicked off Q1 24 with 1.1M SF leased, and Class A rents were up 20% to $36.58/SF per CBRE. The average rent for all types rose 11% to $29.95.
Doubling down: Amazon is expanding its delivery services for groceries and pharmacy goods via 58 same-day fulfillment centers, enabling orders to be shipped in as little as 11 minutes.

🏬 RETAIL

Store closures: Following its Chapter 11 bankruptcy filing last year, Rite Aid is set to close an additional 53 stores across nine states, adding to the 200 already shut down.
Making progress: Darryl Shaw’s 33-acre mixed-use development on Tampa’s Ybor Channel won initial City Council approval, with a key zoning hearing set for next month.

🏢 OFFICE

AI boom: San Francisco’s AI sector saw explosive growth in 2023, leasing 1.3 million square feet of office space and accounting for 25% of the city’s total office leasing.
Vacancy peak? While the U.S. office vacancy rate hit a record 19.8% in Q1, some properties are defying the broader trend.
Conversions: Despite high costs, office building conversions are surging, especially in Cleveland and Houston. CBRE says that completions are expected to double this year.

A MESSAGE FROM PERCENT

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PROPERTY REPORT

U.S. Warehouse Rents Cool Off as Market Demand Wanes

After years of heated competition and rising prices, the U.S. warehouse market is showing signs of cooling. Recent data indicates a notable shift, with average vacancy rates climbing and rent increases stalling.

State of the market: The average warehouse vacancy rate in the U.S. rose to 5.8% in the first quarter of this year, up from 5.2% in the previous quarter, according to Cushman & Wakefield. This uptick is noteworthy, considering the vacancy rate was as low as 3% nationwide at the end of 2022. Concurrently, the average asking rent for industrial real estate has plateaued at $9.73 per square foot annually, marking the first time in four years without a quarterly increase.

Zoom in: Specifically, in California’s Inland Empire, a key logistics hub, asking rents decreased by 2.7% quarter-over-quarter. This reduction is reflected in even lower effective rents, as warehouse owners increase incentives, offering concessions like extended periods of free rent to attract tenants, says Savills.

What to watch: With no clear sign of rate cuts and an uncertain retail market, businesses are adopting a “wait-and-see” approach. This is evidenced by the declining ratio of inventories to sales at general-merchandise retailers, which dropped from a pandemic peak of 1.5 in August 2022 to 1.35 in January, nearing pre-pandemic levels (1.31 in January 2020), according to the Census Bureau. This pullback is reshaping leasing trends and rent structures.

➥ THE TAKEAWAY

Big picture: Despite the recent slowdown, average asking rents across the U.S. remain 53% higher than in the first quarter of 2020, stressing the long-term growth in the industrial sector. However, with approximately 115 million square feet of new warehouse space introduced in Q1—above the decade average of 42 million square feet—there is a clear movement toward stabilizing the market.

📈 CHART OF THE DAY

In 2023, closed-end private real estate funds raised just $98.8 billion, potentially the lowest since 2012, amid a pullback in lending and high interest rates. Opportunistic and distressed strategies drew the most interest, with asset managers offloading office portfolios at significant discounts.