Renters' Golden Age Fading as Apartment Construction Slows

Over the past two years, renters have relished a welcome respite as a surge in apartment construction has tamped down rents from their pandemic-induced peak. Last year alone, developers completed a record number of units nationwide since 1974, leading to an influx of new high-rise apartments competing for tenants. Landlords, eager to fill their vacancies, have offered enticing discounts and perks to entice renters.

However, as construction costs have escalated, the number of new developments in the pipeline has dwindled. Developers, once enthusiastic about expanding their portfolios, are now cutting back on new projects, setting the stage for another apartment shortage. Consequently, renters' time of abundance is coming to an end.

While developers are still projected to deliver around half a million new apartments this year, a slight decline from 2024, landlords will likely focus on retaining their current tenants rather than increasing rents. However, the outlook for renters becomes increasingly bleak in the years beyond 2026.

Despite the recent boom in apartment supply, demand has remained steady, leaving no surplus of vacant units. Furthermore, the construction pipeline has significantly narrowed since the era of cheap money, when developers could easily secure loans for new projects. While numerous new rentals opened in 2024, apartment builders broke ground on the fewest units in over a decade.

"The available inventory of rental housing units may quickly tighten," warns a recent report from RealPage, a software company that assists landlords with rent pricing. Real estate analytics firm Yardi Matrix predicts 2025 as a "year fraught with change," signaling that the current renter-friendly market may not last much longer.

The past few years have witnessed significant upheaval for apartment dwellers. Demand soared in 2021 as renters sought larger accommodations, moved out of their parents' homes, or opted for solo living. This surge in "household formation" pushed up rents even as some people relocated from densely populated cities to suburban single-family homes. Zillow reported that apartment rents increased by over 20% nationally from 2020 to 2022.

Simultaneously, developers laid the groundwork for a reversal. At one point in 2022, over a million new apartment units were under construction across the country. This construction spree has borne fruit over the past two years: According to RealPage, developers opened a total of 440,000 units in 2023 and a record 588,900 last year, with an additional 500,000 expected to come online in 2025.

The influx of new buildings has kept prices in check, reflecting the role of supply in stabilizing the market. With ample units available, renters have more options and are less likely to tolerate excessive rent hikes. Data from Yardi Matrix indicates that year-over-year rent growth has remained below 1% over the past 16 months, well below the double-digit increases of 2022.

Landlord concessions, such as free rent offers, parking incentives, and gift cards, have also resurfaced to attract and retain tenants. By the end of 2024, nearly 13% of units nationwide were providing concessions, approaching the all-time highs witnessed during the early stages of the pandemic, when the rental market faced unprecedented challenges.

The supply boom has benefited all types of renters, not just those seeking luxury accommodations. Landlords typically offer concessions when launching new developments, many of which are classified as "luxury" in today's market. However, even established buildings with more affordable units have adopted these strategies to prevent tenant attrition. "It's just a simple supply-and-demand game," explains Carl Whitaker, chief economist at RealPage. "As more supply delivers, you have to draw more traffic to your property, and that comes with these incentives."

Unfortunately, the good times for renters may be short-lived. Developers rely heavily on debt to finance new projects, and the Federal Reserve's aggressive interest rate hikes have made these loans significantly more expensive, leading to a downturn in construction plans. The wave of new supply entering the market and the prospect of slower rent growth have further deterred builders. As a result, they have laid the groundwork for another apartment shortage, with rents likely to climb once again.

"The pendulum is swinging dramatically," warns housing economist Jay Parsons. "Unfortunately, apartment construction tends to be excessively cyclical, and I don't believe it's beneficial for either renters or investors."

While predicting economic trends can be challenging, forecasting new apartment supply is relatively straightforward. By analyzing the number of units currently under construction, experts can reasonably estimate the supply in the coming years. These projections indicate a significant shift in the rental landscape.

Apartment construction starts plummeted to their lowest level since 2013 last year, according to RealPage. This slowdown will soon become evident in the number of new apartments reaching the market. Yardi Matrix anticipates 524,000 deliveries in 2025, followed by declines to 414,000 in 2026 and 341,000 in 2027. RealPage projects an even steeper reduction, from 470,000 new units this year to 265,000 in 2026, followed by another dip.

Christopher Bruen, an economist at the National Multifamily Housing Council, recently cautioned that this retreat would "likely exacerbate our nation's housing shortage over the longer term."

The effects of this construction pullback will vary across U.S. cities. Most apartments constructed during the recent boom are concentrated in the southern half of the country, including Austin, Atlanta, Phoenix, and Houston. Major mountain region metros like Denver and Salt Lake City have also witnessed a substantial influx of new apartments. While rents in these markets may take longer to rise, housing demand remains elevated, potentially limiting the duration of any relief for renters.

Coastal cities such as New York, Boston, Seattle, and San Francisco, where land availability and permitting hurdles hinder apartment construction, may face even greater challenges for renters. In a recent investor earnings call, an executive at Equity Residential, one of the largest apartment owners in the U.S., characterized the supply reduction in these markets as "even more dramatic," with starts declining by 30% in 2023 and nearly 60% in 2024.

Alexander Brackenridge, the company's chief investment officer, stated that "with 2025 starts projected to be down again, we anticipate one of the best supply-demand balances in our coastal markets that we have seen in a very long time."

However, construction delays may introduce a complicating factor. Doug Ressler, manager of business intelligence at Yardi Matrix, notes that completions expected in 2025 may be pushed back to 2026 or even 2027 due to supply chain disruptions or labor shortages, potentially easing the pressure on renters. The company anticipates modest rent increases of 1.5% this year, 1.1% in 2026, and 3.3% in 2027. Parsons, on the other hand, predicts more substantial year-over-year growth in the "mid-single digits" beginning in 2026. While these increases would fall short of the rapid rent hikes witnessed during the pandemic, they would nonetheless signal the end of the era of generous concessions for renters.

If apartment demand surges, driven by factors such as improved economic sentiment or the perceived value of renting over homeownership, rent growth could exceed these projections. Whitaker observes that it is still early to determine the level of renter demand during the peak summer months, but there are indications that 2025 could be a more active market than the previous year. Both November and December saw an increase in leasing traffic, indicating prospective renters exploring new apartments. While this may not seem significant, it marks the first time since early 2022 that leasing traffic has experienced two consecutive months of year-over-year growth.

"My interpretation is that we are going to see quite a bit of demand this summer," Whitaker concludes.

Are renters destined to endure these cyclical swings, with every semblance of housing relief proving elusive? Parsons believes otherwise. He proposes a bipartisan solution in the form of a national construction fund, which could provide developers with cheaper debt and reduce their susceptibility to interest rate fluctuations. Such a measure could potentially smooth out the volatility of the rental market. However, in the absence of such a fund, renters may face another turbulent ride.

"It took a perfect storm of factors to drive this massive construction boom," reflects Parsons. "And now a lot of those factors have just gone away."

James Rodriguez is a senior reporter on Business Insider's Discourse team.