Coming into 2025, hopes for an increase in housing construction were pinned on lower borrowing costs. But with longer-term interest rates remaining stubbornly elevated and the Federal Reserve showing no urgency to ease policy, higher rents and home prices will be needed to drive an increase in production. That’s grim news for renters and would-be homebuyers alike, but it’s the reality of the situation at a time of lofty construction and financing costs.
This dynamic is most clearly visible in the apartment sector, where a post-pandemic boom in new construction has turned into a bust. Developers started a ton of apartment projects in 2021 and 2022 in cities such as Austin, Texas, as rents surged and while interest rates were low. Once supply started to come online, vacancy rates rose and rents fell. That chill in market conditions combined with high interest rates has led to a slump in new construction. Renters are still somewhat insulated, but the industry is watching for when the slack is squeezed out of a market that’s past “peak supply” with the number of units set to be delivered expected to decline rapidly toward the end of this year and in 2026.
This unusual dynamic of falling rents in many cities but an expectation of looming shortages in rental housing as soon as next year has apartment owners increasingly giddy. Camden Property Trust Chief Financial Officer Alex Jessett said in an earnings’ call last week that 2026 and 2027 should bring “some pretty outsized rental increases.” When pushed on whether supply could surprise to the upside in those years, making for disappointing rental growth, the Sun Belt-based apartment REIT’s Chief Executive Officer Richard Campo said that based on the cost environment developers would have to assume “significant rent increases in ’26, ’27, ’28” for construction to increase.
From the standpoint of apartment operators, if not for the high levels of supply being delivered in cities such as Austin, Nashville and Charlotte, they’d already be positioned to raise rents more aggressively. Camden talked about improving rent-to-income ratios in the Sun Belt as wage growth has outpaced rent growth over the past couple of years. United Dominion Realty Trust, an apartment REIT with 60,000 units across the country, showed in this month’s earnings update that the median rent-to-income ratio of their tenants is currently around 21% versus a longer-term average of 23%.
It’s also the case that renting today is historically cheap versus buying, keeping to record lows the number of people moving out of apartments to purchase houses. Equity Residential Property Trust, with a portfolio of 84,000 apartment units nationwide, said that their full-year turnover in 2024 was the lowest in 30 years of being a public company.
