Some apartment investors are convinced overbuilding will be a short-lived problem. Strong job and population growth, they reason, will combine with stubbornly high mortgage costs for homebuyers to drive demand for rentals to catch up with new supply.

“The pipeline will dry up,” Henry Manoucheri, CEO of Universe Holdings, a private investment and management firm with 7,500 apartments in California, New Jersey and Florida, said in an interview.

Industry concerns over a flood of new supply have emerged along with slowing rent growth, particularly in the Sun Belt. According to a report from Apartments.com, the United States added 565,000 units in 2023, a 40-year high. An additional 443,000 rental units are on the way, mostly in the first half of 2024.

The new construction helped push vacancy rates up 100 basis points at the end of 2023 from the same time in 2022 as asking rents fell. Of the 50 markets analyzed in the Apartments.com report, 18 posted yearly rent declines. Among those, 16 were in the Sun Belt, led by Austin, Texas, where prices dropped more than 5%.

“Definitely lots of supply coming online [in] all the major growth markets that everyone was chasing, you know, Orlando, Tampa, Phoenix, Vegas, Dallas, to Atlanta,” Zamir Kazi, CEO of ZMR Capital, a Tampa, Florida-based investment firm focused on the Sun Belt, told CoStar News. He added that these markets have been dealing with too much supply leading to “flattened rent growth or negative rent growth. So, there's definitely headwinds, you know, especially over the next year or two.”

Kazi said he’s seen owners in Nashville, Tennessee, where rents declined more than 2% in 2023, offering four months of free rent as a concession to prospective renters.

At the same time, rising borrowing costs, along with increases in the price of underwriting, labor and materials, have all but frozen the flow of capital and financing for development, a situation that's brought new construction to a standstill and put an end date on potential difficulties.

“So long as you're willing to kind of deal with operational challenges in the next 24 months,” Kazi added, “the years after, that should look pretty good. Because there's no supply coming online.”

Analysts and investors told CoStar News in interviews in the past week that they expect a meaningful slowdown in the number of new apartments toward the end of 2024 and into 2025. Relative to peak completions in the second quarter of 2023, CoStar analysts anticipate a nearly 40% decline in new apartments nationwide by the second quarter of 2024. By 2025, that drop could reach close to 60% during the same three-month period, buoying investors’ hopes for the future prospects in most markets.

“With what's in the pipeline right now, I think it's a short-term supply issue,” Brennan Degnar, CEO of DB Capital Management, an owner and operator based in Denver with $600 million in assets across Colorado, Utah, Nevada and Texas, said in an interview. “I think everyone kind of knows that based on what happened over the last couple years, you're just going to see, naturally you're going to see less development.”

Pauses in construction, however, won’t interrupt the underlying fundamentals such as job and population growth, along with high barriers to homeownership, that accelerated moves to the Sun Belt during the pandemic, sparking the building boom in the first place.

What will fuel rent growth is “jobs, jobs, jobs,” said Eddie Lorin, founder of Strategic Realty Holdings, a California-based firm focused on affordable and workforce apartments. “If you don’t have job growth, you don’t have rent growth and apartment growth. It’s all about jobs.”

Job growth in Austin has accelerated in eight of the past nine years, with 2020 being the only exception, according to an investment forecast from Marcus and Millichap. The company projected total employment to expand by 2.6% on a yearly basis to reach close to 1.4 million in 2024, a roughly 40% increase from a decade ago.

Also contributing to potential rent growth is a tight mortgage market that prices many would-be homebuyers out, expanding the pool of renters.

The typical payment on a median-priced home is now $850 more expensive than the average Class A apartment, and only about a quarter of households — half the 2019 level — even qualify for a mortgage, according to Marcus and Millichap.

“It’s driving a lot of the demand.” Manoucheri said. “A lot more people are now forced to rent. Because [even] if they have a down payment, they can’t borrow money at 7%, or 6.5%. And inventory is way down because whoever has a mortgage below 5%, they're not going to sell their house.”

Still, these fundamental drivers of demand, much like the concentration of new construction seen over the past two years, won’t be spread evenly, Degner said.