The Big Idea
The apartment building boom Is ending
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In the wake of the acute shortage of housing that developed during the pandemic, builders of apartment complexes stepped up and constructed a record number of units. Supply and demand for apartment units has shifted into better balance, although with gluts in some cities, and construction has returned to a more normal pace. Industry reports suggest that by later this year, the number of units coming on line will have fallen to a point that the rental market may begin to tighten again. Concerns about shelter costs may persist for the Fed.
Multi-unit construction boom
The pandemic in 2020 set off a massive increase in the demand for housing units. Many households wanted a second home, while others, who might have been doubling or tripling up—such as young adults still living with their parents—wanted a place of their own. In 2020, the annual rise in household formation doubled from a pre-pandemic trend of about 1.5 million a year to 3 million, and little of that acceleration was given back in subsequent years. A housing market that was said to already have a supply deficit measuring millions of units became even tighter.
A sellers’ market developed both for single-family homes and for apartments. Builders of apartments rushed into action, kicking off a building boom in 2021 that kept apartment starts elevated for three years (Exhibit 1). The apartment building boom began in 2021, peaked in 2022, and by last year, the pace of starts had moved somewhat below the pre-pandemic level to the lowest reading since 2013.
Exhibit 1: Pandemic pushed up multi-unit housing starts 2021-2023
Source: Census Bureau.
The life cycle for a large apartment building project tends to run 12 to 18 months and can extend to as long as two years. That creates a significant lag between the date of a start and the time a new building is ready for tenants. The starts figures measure what is happening at the beginning of this cycle. The dollar value of construction spending on new multi-unit buildings is timelier (Exhibit 2). Not surprisingly, this measure peaked later, in 2023, and, while it has been falling for about 18 months, is still running well above its pre-pandemic pace.
Exhibit 2: Spending on Multi-Unit Residential Construction
Source: Census Bureau.
Reports from the ground
A recent article in the Wall Street Journal, titled “We’re Headed Toward a Landlord-Friendly Era. Expect Higher Rent Prices.”, canvasses a variety of contacts in the business. The conclusion was that a market that had gone from severe shortage to plentiful supply, even gluts in a few cities with particularly heavy construction like Austin and Phoenix, was beginning to shift back into balance.
According to real estate firm CBRE, apartment absorption was higher in the fourth quarter than in any fourth quarter since at least 1985. RentCafe reported that as supply growth is sliding, demand remains strong, with an average of nine prospective renters competing for each open apartment unit last year.
For now, the pipeline is still pumping out a robust stream of new units. According to the Census Bureau, completed units for buildings with five or more units still averaged nearly 600,000 in 2024, up sharply from 347,000 in 2019. However, the pipeline of units under construction has been thinning, consistent with the multi-unit spending numbers. The number of units under construction in buildings with five or more units was running at about 650,000 just before the pandemic, peaked in mid-2023 at 1 million, and has been dropping rapidly in recent months, sliding to 751,000 in January, down by 137,000 in the past six months. Extrapolating that trend, by the second half of 2025, the pipeline will be below the pre-pandemic level, consistent with where starts were in 2024 relative to the pre-pandemic benchmark. Indeed, the WSJ article concludes that “landlords say that the new construction pipeline should be mostly drained by year-end.”
Shelter costs
The ongoing slowdown in the construction of multi-unit buildings has modest negative implications for GDP growth in 2025. However, the bigger story, and the main focus of the WSJ article, is the potential fallout for apartment rents. The CEO at Gaia Real Estate, a national real-estate investment and management firm, sees rent growth resuming in the second half of 2025 and into 2026. His company had exited Sunbelt markets but has begun to buy properties in the region again. Similarly, the head of analytics at CoStar told the WSJ that every major metropolitan market in the U.S. should see positive rent growth by the end of this year.
The shifting supply-demand dynamics in the rental market can be seen in the national Zillow rent index (Exhibit 3). Rent inflation on a year-over-year basis surged in 2021 and into 2022 and then slowly subsided. By late 2023, the year-over-year advance had fallen to just above 3%, modestly lower than the prevailing rate of growth prior to the pandemic. Over the past 18 months, this gauge has been broadly stable, running between 3% and 3.5%.
Exhibit 3: Zillow Rent Index Year-over-Year Percent Growth
Source: Zillow, Bloomberg.
If, as industry experts suggest, apartment rent inflation is likely to begin accelerating by late 2025, then the hopes of Fed officials that shelter costs will continue to moderate may be dashed soon. Moreover, tariffs on Canadian lumber and imported steel and restrictions on migrant labor could lead to sharp hikes in construction costs going forward, which could further boost housing costs over the next year or two for apartments and single-family homes.
While the drag on economic growth from slowing apartment construction should be relatively modest, the inflation implications of a developing tightening in rental markets could be large enough to influence the monetary policy outlook late this year and in 2026.
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