2025 to be a ‘transitional year’ for supply-demand trends

Like others, Jay Parsons, head of investment strategy at Lubbock, Texas-based owner and operator Madera Residential, expects an improved vacancy and concessions picture in the second half of the year as supply burns off.

“If you think about the impact to rent roll growth, which is more of a lagging indicator, and the final part of this lease-up wave stabilizing, I think 2026 continues to be more of a reasonable target [for rent growth],” Parsons said. “You can even make the case that it will be an above-average year.”

Despite that record-high Q3 supply, apartment owners, even in markets with high competition, were able to survive 2024. The reason was record high demand.

“Employment growth continues to surprise to the upside, and income growth has outpaced consensus expectations,” UDR CEO Tom Toomey said on the Highlands Ranch, Colorado-based REIT’s Q3 earnings call in October. “This has led to more than 450,000 newly delivered apartment homes being absorbed nationally during the first nine months of the year, which is approximately 50% above the long-term average.”

MAA, with a Sun Belt portfolio facing pressure from new supply, saw record low turnover in Q3, and it was the first quarter since Q1 2022 where the number of units absorbed exceeded the apartments delivered in its markets.

High interest rates have boosted rental demand by making homeownership more expensive. For instance, in Arlington, Virginia-based AvalonBay Communities’ coastal markets, the spread between renting and owning a home is the widest company executives have seen.

“This lack of affordable for-sale alternatives should continue to support a lower level of resident turnover and a greater propensity for new households to rent versus own,” Sean Breslin, AVB’s chief operating officer, said on the REIT’s Q3 earnings call in November.

In 2025, AVB executives see strong demand to support revenue growth. In its established coastal regions, rent-to-income ratios are currently about 10% below where they were at the beginning of 2020, according to Breslin.

“A financially well-positioned renter and relatively unaffordable for-sale housing alternatives will all support steady demand for our apartment homes in the year ahead,” Breslin said.

While Breslin expects healthy job and wage growth, economic issues, should they arise, could impact demand. On UDR’s Q3 call, President and Chief Financial Officer Joe Fisher said that the “wild card” for the year would be “what takes place with jobs and wages, household formation, et cetera.”

With demand on track to remain strong, supply again appears to be the key factor in rental performance in 2025. In those Sun Belt markets with high supply, it could be challenging even with fewer new deliveries than in 2024.

Chicago-based Equity Residential CEO Mark Parrell doesn’t expect a recovery in same-store revenue in the REIT’s Sun Belt expansion markets until 2026. UDR sees pricing stability in Denver, Dallas, and Tampa and Orlando in Florida by mid-2025, but other markets will continue to struggle.

“The timeline for Nashville and Austin are elongated, and we would expect supply-demand equilibrium in late 2025 and into 2026 in those markets,” UDR Senior Vice President of Operations Mike Lacy said on the Q3 earnings call.

However, some executives with Sun Belt properties predict improvement earlier in the year.

“We expect to see normal seasonal leasing patterns for the next couple of quarters and remain convinced that the spring leasing season will usher in the start of a recovery cycle with more favorable leasing conditions as demand and absorption trends across our markets remain strong and the volume of new supply deliveries steadily declines,” Bolton said.

Even with that expected improvement, things look better in the coastal markets. There, AVB expects new deliveries to be 1.4% of existing stock in 2025, roughly 100 basis points lower than what’s forecast for the Sun Belt, according to Breslin.

“Our same-store portfolio will further benefit from being roughly 70% suburban, where deliveries are expected to be roughly 1% of stock in 2025,” Breslin said. “Overall, we believe our portfolio is well insulated from the impact of excessive new supply in 2025.”

Helping drive coastal performance for apartment operators will be continued strength on the East Coast and return-to-office policies from major employers like Salesforce and Amazon on the West Coast.

“I’m not sure we felt the full impact of [the return to office] yet across all of our coastal regions as people are sort of inching their way back to what they think is a normal state,” Breslin said.

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