Recent headlines regarding single family residential real estate have highlighted little inventory and steep interest rates — with the exception of multifamily housing. Apartment rents had begun to slow in October of 2023.

This may be due in part to the jump in rental vacancy rates, from 5.8% at the end of 2022 to 6.4% at the beginning of 2023, with a significant amount of new multifamily construction coming onto the market. More supply and more vacant units mean that there’s slightly less competition for open rentals and typically slower asking rent price growth. However, as home prices remain high, renting is becoming a more financially attractive alternative, so there may be increased demand for rental units in 2024, according the Bipartisan Policy Center.

Multifamily Units and Demand

The multifamily housing market may seem counterintuitive because the demand for shelter greatly exceeds supply.

The U.S. had a population of 335.3 million people in July 2023, up almost five million when compared with four years earlier. In a typical market, more people would result in more housing demand and higher prices — especially when supply has not kept up.

“The current problem related to the single-family housing market is limited supply,” said Lawrence Yun, chief economist with the National Association of Realtors (NAR). Speaking in September 2023, Yun explained that “even before the onset of the pandemic, in 2019, there was a shortage of approximately 4-to-5 million housing units in America.”

The lack of supply in the residential housing market is forcing up sale prices despite sharp mortgage rate increases.

According to the November 2023  AEI Price Appreciation Index, year over year house price appreciation bottomed out in April and is expected to continue rising for the foreseeable future. This is largely market specific. “Metros in the Midwest continue to lead on home price gains as their supply-demand imbalances persist. Grand Rapids, still relatively affordable, appreciated at the fastest rate compared to a year ago, while Austin, one of the fastest growing metros during the pandemic period, depreciated at the fastest rate,” says Tobias Peter of AEI.

Meanwhile, private multifamily starts for properties with five or more units stood at 334,000 in August 2023 versus 566,000 a year earlier, due mostly from economic uncertainty as many construction investors are being cautious.

Currently, we have an apartment surplus and little rent growth which may quickly evolve in 2024.

The Multifamily Housing Opportunity reported in August 2023 that “renting a starter home is a more affordable option than buying in all but three of the largest US metros.”

With rents a little softer and up-front cash requirements much lower than a typical home purchase, apartments should be in demand. This raises a crucial question: Where are the renters?

Not Renting and Not Buying

Millions of prospective tenants are simply outside the formal housing market. They’re not renting and they’re not buying, mainly due to the pandemic. Figures from the U.S. Census Bureau’s American Community Survey show where these prospects were living in 2022.

Among those individuals age 18 to 34, 23.2 million live with mom and dad while 8.9 million live with other relatives. That’s 32.1 million potential tenants.

Also, if you look at those between the ages of 35 and 64, you can see huge numbers of additional prospects. In this group, the Census Bureau estimates that 5.8 million lived with a parent, and 16.3 million lived with other relatives. That’s another 22.1 million potential tenants or a total of more than 54 million people (32.1 million plus 22.1 million) who might be in the market for rental housing.

Multifamily and Tomorrow

There’s a somewhat  optimistic case to be made for multifamily housing.

First, rent growth is beginning to escalate. In March, CBRE forecast “rent growth of 3.5% for the year, down from 6.7% in 2022 and 13.4% in 2021 but still relatively healthy when compared with the long-run average of 2.5%.”

Second, pandemic rental restrictions are lifting.  Federal foreclosure and eviction bans have come to an end. A lot less people than were expected lost  their homes and apartments when such policies ended.

Third, the job market remains strong with in November 2023,  the unemployment rate edged down slightly to 3.7 percent, the U.S. Bureau of Labor Statistics reported.

Fourth, actions by the Federal Reserve to raise interest rates to control inflation may begin to slow. Mortgage rates fell steadily throughout November and December 2023, landing at 6.61% during the final week of the year, according to the Dec. 28, 2023, Freddie Mac Primary Mortgage Market Survey®. Lower mortgage rates in general would help multifamily investors who need to refinance or require additional financing to reinvest in struggling properties.

Fifth, an estimated four million people turn 18 each year. They represent a potential stream of additional renters and homeowners over time. However, according to a September 2023 survey from Harris Poll for Bloomberg, roughly 45% of people ages 18 to 29 are living at home with their families — the highest figure since the 1940s. More than 60% of Gen-Zers and Millennials reported moving back home in the past two years, according to the poll, often because of financial challenges.

Sixth, with stronger incomes and lower interest rates it may well be that some of those who now neither rent nor own might have a greater interest in apartment living. If just 5% of those 54 million individuals elect to rent that would mean another 2.7 million apartment hunters.

While there’s little to suggests that all apartment property types or markets are doing significantly better than others, luxury apartments are still faring well, proving that quality, amenity-rich locations are resilient despite a slowdown in demand for other housing categories. Those with dollars to spend but who don’t want — or can’t find — a home seek the next best route; they’re leasing a high-quality product.

For example, KBS’ luxury multifamily property Park Central in Raleigh, North Carolina, is nearly 100% leased. With the start of 2024, we may begin to see some financial hurdles easing, and the demand is there — especially in areas with growing populations.

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