10 Takeaways from Newly Released Q3'24 Apartment Data

Sponsored by: Madera Residential

Fresh data! Always a good thing for data nerds like me. Here are 10 takeaways from mining Q3’24 data on the U.S. apartment market.

#1: Apartment demand is seriously big – and don’t give the stalled-out homebuyer market all the credit.

We’re on track for 2024 to be the second-best year in 25+ years for apartment absorption, topped only by the post-COVID boom of 2021.

Remember that 2021 was a year when the for-sale housing market was on fire, yet we still saw unbelievable demand for apartments. It’s both/and. Apartment demand doesn’t typically come at expense of for-sale housing demand or vice versa. Rising tide boosts all ships. Sure, fewer people are moving out to buy houses right now and that helps retention a bit. But that doesn’t explain the hundreds of thousands of newly formed renter households.

Credit the strong economy, healthy job market, low unemployment, slowing inflation, improving consumer confidence, and wages growing faster than rents.

Here’s how the big three data providers talked about demand in their public reports:

CoStar: "Strong rebound in demand" and "smallest supply-demand gap in 3 years."

RealPage: "Apartment demand again looked quite remarkable."

Yardi: "Demand has remained strong."

#2: There’s a lot of demand, but even more supply. That’s why you may not be seeing a pickup in traffic or leasing.

If you’re not “feeling” this demand wave translate to increased traffic or leasing at the site level or portfolio level, that’s no surprise. There’s even more supply than demand. In fact, in the top 20 markets for T-12 absorption, supply topped demand. That list includes not only the Sun Belt, but markets like Washington DC, New York, Seattle, Minneapolis and Philadelphia.

Just how much supply is it?

We've added more new apartments in the first nine months of 2024 than we did in ANY FULL CALENDAR YEAR since 1987! Here are the numbers:

-- Completions in 2024 YTD total 438,259 units. That just barely eclipses 2023's full calendar year total. Prior to that, we hadn't built more than 400k units in any year since 1987.

-- Completions in Q3 2024 alone approached 163k rental apartment units. That's MORE than nearly every FULL calendar year between 2003 to 2012 (with only exceptions being 2008-09, back when many people thought 200k units was a lot. Ha).

-- At the moment, Q3'24 appears to be the top of the mountain. Peak quarterly supply.

-- We're on track to add another 161k units in Q4'24. Some of those may get delayed into 2025, but the full calendar year total should still approach the 600k mark -- levels not seen since 1974.

#3: Therefore, rents remain flat – and continue to trail wage growth

U.S. apartment rent growth continues to hold around 0%, where it's hovered since summer 2023 due to the historic deluge of new supply. That marks 15 straight months of flat-ish rent growth and 21 straight months where wage growth topped rent growth.

Good news is we’re a couple months away from erasing the ENTIRE rent>wage hump from 2021-22. That's huge! The improving affordability story widens the demand funnel, a win/win for renters and investors.

While the year-over-year rent change was flat, September's month-over-month cut was somewhat notable at -0.46%. That was the largest September cut in about 15 years, and a bit deeper than last year's -0.31%. The big monthly cuts were (no surprise) concentrated in high-supplied markets.

#4: Occupancy rates are holding up better than expected

I thought we’d see a bit more occupancy deterioration than we have. Both CoStar and RealPage reported Q3 occupancy upticks, while Yardi reported occupancy flat at a (still-healthy) 94.8%, according to their public releases.

Of course, Q3 is a seasonally strong leasing period where we normally see occupancy improve. But Q3’24 is no typical third quarter, with supply levels higher than any quarter going back multiple decades.

Bear in mind that most of the data providers exclude lease-ups from market occupancy rates – and those new builds are taking longer to lease up these days. As those lease-ups stabilize, that could pull down the overall numbers a bit. But the current data is still notable because it means existing apartments are maintaining/improving occupancy amidst elevated new competition.

#5: Renter retention rates remain surprisingly high

I’ve said this before, but the upward trend in retention is one thing I did not expect to see in 2024, given the historic volume of supply hitting the market and giving renters more options than ever.

September’s T-12 retention rate of 54.0% is higher than any pre-COVID period, back when retention more typically ranged between 51-53%. And September 2024’s monthly retention rate of 55.2% was higher than any September in at least 15 years OTHER than 2021.

Again, lots of folks will want to credit reduced move-outs to home purchase. And, sure, that’s a factor, but it’s not that simple. Those renters can go elsewhere (and many do) even if they’re not buying. I’d give more credit to the industry-wide focus on “heads in beds” – back-to-the-basics focus on customer service, quick resolution to maintenance, etc.

#6: Rents keep growing where supply ain’t going

The data providers don’t all agree on which market is leading the country for rent growth. But no matter which list you look at, they all show rent growth leaderboards dominated by low-supply markets – predominantly those across the Midwest and Northeast.

Among those markets, rent growth appears to be stabilizing at normal-ism numbers in the 2-4% range. Leaders include: Kansas City, Detroit, Washington DC, Milwaukee, Cleveland, Chicago, Pittsburgh and Columbus. Not exactly the usual suspects (until recently).

The correlation between rents and supply is another sign that rent movement right now is all about supply and not affordability.

#7: Rents are still falling where supply is going in big numbers, but it’s not getting much worse

The data providers all agree on the market with the deepest rent cut: Austin, TX. Rents there are down 5-8%, depending on who you ask.

Others with sizable cuts include Raleigh, Jacksonville, Phoenix, San Antonio and Atlanta – all elevated-supply markets.

Another reminder that if you really care about rental affordability, you should be laser focused on removing barriers to new construction (of which there are now plenty).

#8: The market in a category of its own

Huntsville, Alabama, continues to boom like none other — and requires me to expand the X axis in my supply/rent scatter chart above! New supply additions ballooned its apartment stock by 16.4% year-over-year. That’s well above No. 2 Lakeland, FL (11.7%). Only one other reached 10% (Myrtle Beach, SC).

Huntsville is also a demand leader. Its grown its apartment renter base by more than 40% since early 2020, more than 10 percentage points above every other market. Credit to booming aerospace industry plus a nice mix of blue-collar and white-collar jobs.

Huntsville is on the rise. But in the short term, it’s a tough market both for apartment and for BTR operators given the volume of new supply.

#9: Starts are outpacing completions by a historically large margin

New Census data shows that we’ve completed 168,800 more units than we starts through the first eight months of 2024. That’s the largest gap on record going back to 1968.

And yet another sign that supply volumes will come down significantly by late 2025 and into 2026. I remain of the view that today’s supply peak is a generational high resulting from a perfect storm of factors unlikely to be repeated again any time soon. Starts data suggests we’re trending below pre-COVID norms, and future supply could look more like 2012-15.

#10: Apartment prices appear to have bottomed, but sales volumes remain compressed

We’ve seen reports from MSCI, CBRE and Green Street that apartment pricing is flattening and/or improving again. Investors have increasingly rallied around the view that apartments are well positioned once the current supply wave subsides.

We’re also hearing anecdotal reports that brokers are much busier these days with BOVs and preparing to take more deals to market.

That might soon translate to increased deal volume, but it hasn’t yet happened. It looks like Q3 will go down as another ho-hum quarter for sales. Curious to see if there’s any material pickup before year end, if any investors are incentivized to close within the 2024 calendar year.

Disclaimer: The contents of this newsletter are for informational purposes, not investment advice. No recommendation or advice is being given.

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