The anticipated end to record amounts of new supply has some of the largest apartment owners in the country buying and building in a tangible sign of confidence in the long-term prospects for multifamily demand.
Some apartment real estate investment trust executives are forecasting opportunities to increase revenue will begin to emerge as early as the second quarter of next year.
“I remain convinced that the spring leasing season will usher in the start of a recovery cycle with more favorable leasing conditions,” Eric Bolton, chairman and chief executive at Mid-America Apartment Communities, said Thursday on the company’s third-quarter earnings call.
The expectations have brought several publicly traded multifamily owners off the sidelines, including MAA, Equity Residential, and UDR that have invested in major development pipelines and significant outlays for acquisitions in the third quarter, hoping to capture strong demand as oversupply fades into the background.
Equity reported spending $1.26 billion on 14 new acquisitions on its third-quarter earnings call Thursday after recording just one property purchase in the first six months of 2024. Included in the deals was an 11-property, $964 million deal with private equity giant Blackstone that expanded Equity’s portfolio in high-supply markets including Denver, Dallas, and Atlanta.
MAA, meanwhile, said it is on track to maintain a $1 billion development pipeline in the Sun Belt after funding an additional $167 million in the third quarter, bringing its total projects under development to $978 million. In addition, the company has purchased more than $270 million in apartment properties, including a 310-unit property in Orlando, Florida, and a 386-unit property outside Dallas in the third quarter alone.
Demand drivers
Investment activity that expanded in the third quarter is being driven by an expectation that a generational peak in new supply that has been dragging down rents is now behind the industry.
Coupled with the supply slowdown is an assumption that strong demand — sparked by an overperforming job market, the high cost of homeownership, and the maturity of new technology hubs in the South — will remain.
At UDR, where Sun Belt markets make up roughly a quarter of its operating income, the region is lagging behind its coastal markets with a rental growth rate that has declined by 2% across renewals and new leases in the third quarter while revenue was down 1.5%.
At the same time “absorption of new supply has been tremendous," Mike Lacey, senior vice president of operations, said on an earnings call Thursday, even if the company has made some concessions to renters in favor of maintaining occupancy.
Still, given the level of demand, UDR expects new supply, which it said is slowing, to be taken up relatively quickly and expects pricing stability to return to markets such as Denver, Dallas, and Tampa and Orlando, Florida, by the middle of next year.
In Nashville, Tennessee, and Austin, Texas, where supply pressures are even greater, the company isn't forecasting a start to rate rebounds until 2026.
Too early to call
Estimates from Equity were less certain. The company said it was still in the early stages of its budgeting process but remained optimistic that a turnaround is coming.
“I think it’s a little bit too early for me to kind of give you the guidance on where we think … market rents are going to grow,” Michael Maelis, executive vice president and chief operating officer at Equity, said on his company's call. “We have a lot of things that are set up to be catalysts for us, but we also know we've still got to work through some of the absorption of supply in some of these markets. I think we’ll just kind of see how this plays out for the next couple of quarters.”
The most bullish firm on the near-term future was MAA, the only one of the three apartment REITs reporting earnings Thursday that has traditionally made the Sun Belt the core of its business.
Bolton said he was beginning to see trends in new lease pricing that supported his company’s position that the worst of supply pressures are behind, and the sector is poised to see moderating rents as normal seasonality continues into 2025.
While executives noted some difference among markets, all were positioned to enter a stronger leasing environment beginning as early as the spring or summer of next year, they said.
“Do I think that by '27, '28, '29 that we could see supply levels pick up from where they will likely be in 25, 26? It’s certainly possible," Bolton said. "But I think that the idea we are going to any time in the next 10 years repeat this 50-year high cycle is not reasonable in my opinion.”