Better multifamily absorption through 2024 is expected to continue into 2025 even if the pace of absorption drops slightly as new deliveries slow thanks to several strong demand drivers.
According to an analysis by RealPage, 667,000 total units were absorbed last year even as job growth slowed. Sector observers will be keeping an eye on potential apartment demand concerns tied to moderating job growth in 2025, the analysis said.
The US economy is expected to add slightly more than one million jobs this year, representing job growth of 1%. This figure is below prior year job growth but still anything positive remains a driver in demand, helping drive rent expectations. RealPage also noted that the recent cycle of interest rate cuts may spur economic growth in some sectors, including information, professional/business services and financial activities.
Another driver of multifamily demand in 2025 could be improving affordability spurring household formation. RealPage data shows the country’s rent-to-income ratio trending down in 2024, nearing pre-COVID levels of roughly 22% driven by continued wage growth that has outpaced modest rent growth since Q3 2023. This trend could lead to a release of pent-up demand and a decrease in the average number of residents per new lease. In 2023, there were 1.46 residents per new lease, which dropped to 1.42 residents per agreement in 2024, said RealPage.
Meanwhile, the single-family market remains a tailwind for the multifamily sector. Single-family home prices are up nearly 50% since the start of 2020 while rents are up 29%. Demand attrition into the single-family arena is well below historical levels, RealPage said.
Improving consumer sentiment and easing inflation also should boost apartment absorption, as consumers who feel better about their economic prospects are more likely to form households and spend money. Consumer sentiment reached its highest rate at the end of 2024 since early 2020, noted RealPage.
Finally, improved resident retention means fewer units will need to be backfilled, said the report.
“Though demand is synonymous with absorption in a technical sense, it’s sometimes useful to think of absorption as a quantitative measure and demand as a more holistic summation of the state of the market,” said RealPage.
Demand can be assessed via new leases and renewals. Renewals increased more than expected – about 2% in 2024, which has effectively increased the occupancy baseline. With fewer move-outs, any increase in new leases signed contributes to overall aggregate demand, said RealPage.
Meanwhile, new lease traffic has increased alongside some ancillary factors such as increased concession utilization, said RealPage. In these cases, concessions may be stimulating traffic to individual properties, the firm said.