Why New Supply Won’t Dampen Housing Demand

Structural tailwinds favor multifamily investment despite all the construction, writes Todd Henderson of DWS Group.

Todd Henderson

The post-pandemic resurgence in apartment demand is being driven largely by strong job growth, improving consumer sentiment and a housing market undergoing a major shift. While leasing demand remains strong, it’s not enough to keep pace with the country’s largest apartment construction surge in 30 plus years. For the first time ever, in 2023, CBRE revealed that 1 million new apartment units were under construction, with completions expected to peak in 2024. This wave of supply will likely limit rent growth in 2024.

However, the supply surge won’t last long as key forward-looking indicators for construction spending are showing signs of a major pullback. Apartment construction starts have slowed sharply, with some analysts suggesting a further 30-40 percent decline in starts for 2024. This is not surprising given the interrelated set of obstacles that developers are facing, including the cost and reduced availability of debt, as well as high land and construction costs that are making it difficult to finance new properties.

Moody’s Analytics recently noted that, even if 2024 turns out to be a year of solid residential construction, the total housing deficit will remain in the 1.5 million to 2.0 million range, with a shortfall of 300,000-800,000 apartment units.  This sets the stage for strong rental rate growth.

Buying a home has never been more challenging

Since the pandemic, the U.S. housing market has been undergoing a major shift. The combined effect of higher mortgage rates and home price appreciation has tipped the cost of buying a home vs. renting decidedly in favor of renting and pushed up the average age of the first-time homebuyer. The “buy premium”—the difference between the monthly cost of a new home purchase vs. a new apartment lease—was 35 percent in February 2024, according to recent data from the National Association of Realtors, Yardi-Matrix and Freddie Mac. That’s a spread of over $900 per month. For perspective, the buy premium was at its 20-year average of 10 percent at the end of 2020, a spread of just $160 per month.

Many that can afford to own choose to rent

The American household is changing as home ownership is not a priority for everyone, namely for Millennials and Gen Zers. Lifestyle renters in general seek housing that provide them with financial flexibility and the most comfortable and convenient luxuries. This shift suggests that not only are households at large changing shape, but the shift is toward those households that are also more likely to rent.

A mid-rise apartment building, currently the most popular building type for developers, takes almost two years to complete, meaning every unit not started today is a unit not available to lease 24 months from now. The current oversupply is likely to be absorbed by then, and the apartment market could swing back to a condition of undersupply, leading to favorable market fundamentals and accelerating rent growth for the next several years and beyond depending on the timing of supply coming back online.

After a year of declining values in 2023, DWS believes 2024 should provide an attractive entry point for investors seeking to capitalize on the structural tailwinds of rebounding demand and diminishing supply that  support longer term investment opportunities in the residential real estate sector.

Todd Henderson is the co-global head of Real Estate at DWS Group, a global asset manager with $83 billion in real estate assets.

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