US Apartment Demand Surges Amidst Slowing Construction

U.S. apartment demand experienced its strongest quarter in nearly two years during Q2, as renter absorption outpaced a declining construction pipeline, according to a report by Cushman & Wakefield. Despite a subdued broader economy with weak job growth and reduced migration and birth rates, renters filled 124,600 more units than they vacated, marking the fifth-busiest leasing period in almost 25 years and an 8% increase from the previous year. National apartment vacancy rates fell below 9% for the first time in two years, indicating a potential peak in the surplus of empty units as renters absorbed more apartments than were delivered over the past year, a trend not seen since early 2022.

The slowdown in new apartment development is attributed to soaring interest rates and construction costs, which impacted projects that peaked in 2022. Cushman reported that only 88,000 new apartments were completed in Q2, the slowest second quarter since 2022 and a 27% decrease from the prior year. Currently, only 3.5% of the existing apartment stock is under construction, a significant drop from its 2023 peak and the lowest share recorded since 2013. Further indicating a sluggish outlook for new projects, the Architecture Billing Index, a proxy for pre-development activity, shows architecture firms have been in a downturn for 41 months without a majority reporting billings growth.

This tightening supply and increasing demand have led to a modest but noticeable uptick in rents. Rents increased by 1.5% year-over-year, a slight acceleration from the 1.1% growth observed in the previous quarter, signaling the first signs of rent acceleration in approximately a year. This pricing power recovery is following the occupancy recovery, with rent growth still trailing behind the rebound in occupancy rates.