Over the past six quarters, the U.S. multifamily sector has posted stagnant rent growth, with an average annual increase of just 1% after setting a national record high of a 9.8% average annual rent increase at the beginning of 2022.
For the year, apartment rents are expected to finish 2024 barely positive, with a 0.8% increase. The pullback in landlords' ability to raise rents is directly tied to the large amount of new supply outpacing demand, which pushed the national apartment vacancy rate up almost 310 basis points to 7.9%.
While national rent growth may remain below 1% into 2025, reduced levels of apartment completions, combined with the strong demand from renters, could set the stage for rent hikes to begin accelerating.
After reaching a 40-year high of 692,000 apartment units added in 2024, expected completions of new units in 2025 will likely decline by 50% to the mid-300,000 range. At the same time, demand appears poised to remain above 400,000 units if economic growth remains steady and potential new renters feel confident about signing a lease.
Average-quality three-star-rated apartments could lead the rent growth expansion. These mid-priced assets finished 2024 with an average rent increase of 1.6%, and units at this price point have been less affected by the oversupply conditions experienced at the top end of the market. Therefore, a release of pent-up demand should have a swift impact on three-star rent performance. However, properties in the four- and five-star price points will most likely continue to struggle to increase rents due to the supply overhang.
Market-level rents could also increase meaningfully. All major multifamily markets except two are forecast to achieve higher average rents by the end of 2024. This contrasts with 17 major markets finishing 2024 with lower average rents. In addition, the forecast predicts that 29 major U.S. multifamily markets will see average rent growth exceeding their five-year pre-pandemic annual average growth rate, a strong sign that these markets have shifted into rent growth expansion.
The CoStar market forecasts also show that many Sun Belt locations will likely continue to see stagnant apartment rent growth well below their pre-pandemic annual average. Many of these markets are experiencing significant oversupply conditions and will need more time to recover.
Moreover, the rent growth forecasts reflect conditions expected at the end of next year, which means some of the hardest-hit markets in 2024 could contend with weak performance for more than half the year. For example, Dallas-Fort Worth will likely not experience positive rent growth year-over-year until the fourth quarter of 2025.
Overall, the year ahead has the potential to reverse three years of stagnating rent growth in the multifamily sector, transitioning to conditions conducive to increasing rents by the second half of the year.
However, the transition to market stabilization and then expansion phase will vary widely for individual markets. Midwest and Northeast markets have the best opportunity for rent growth, but markets in the Sun Belt will most likely lag other regions as they contend with oversupply conditions before they see the return of meaningful positive rent growth.
