After more than a decade of outpacing expectations, the performance of the apartment market has moderated somewhat in recent years.
New deliveries from merchant builders have translated into higher supply, which is hitting several U.S. markets, and that has reduced multifamily occupancy levels from the highs experienced just after COVID. In turn, rent growth has slowed in many metros, and rents have actually declined in others. Meanwhile, investment sale volumes of multifamily properties have plunged.
Nevertheless, as viewed by many investors, long-term fundamentals of multifamily remain sound.
That's the viewpoint of Frank Roessler, founder and CEO of Ashcroft Capital, a vertically integrated multifamily investment firm that owns and manages nearly 14,000 apartment homes across the Sun Belt.
"Within our markets in the Sun Belt, multifamily investment fundamentals remain strong," Roessler said. "Though the capital markets that the industry is sitting on have received a shakeup due to interest rate rise, many Americans are remaining renters-by-choice well into their 30s. When you combine that generational shift with strong in-migration and favorable tax treatment within our markets, it bodes well for investment. You can see that in Ashcroft's portfolio—we have an average occupancy of just over 93%, which is strong given the short-term softening from the supply hitting several U.S. markets."
Because the apartment market is on stable footing, multifamily properties are poised to remain good investments for high-net-worth individuals, family offices and institutional capital, Roessler adds.
"For more than one reason, there will be robust demand for apartments from renters now and in the future," Roessler said. "When there's strong demand and owner/operators committed to providing high-quality living experiences, that leads to strong investment performance."
Digging into the Data
According to CoStar, 533,000 new apartment units are expected to be delivered in 2024, which would represent a 9% decline from the 40-year high of 588,000 units delivered last year. Against this surge of new construction, vacancy rates have risen even though demand from renters is healthy.
CoStar estimated the national apartment vacancy rate would reach 7.9% by the start of the third quarter, up from 4.8% in third-quarter 2021. Relatedly, national rent growth has tapered. Annual rent growth stood at less than 1% in May 2024, down from 10.2% in first-quarter 2022, according to CoStar.
With operating fundamentals taking a hit and high interest rates, the sales of apartment communities have plummeted. CoStar projected that 2024 multifamily property sales would total approximately $30 billion by the end of June, which the research firm says would mark "the most sluggish start since 2012."
The pace of property sales could remain slow for a while, Roessler notes.
"2024 is proving to be a challenging year for transactional velocity," he said. "We are seeing some investment confidence seep back into the markets, but with this being an election year, we aren't expecting much change. We could see transactions pick up in 2025 depending on federal policy change, but though we are seeing inflation lessen, it is probably not dropping rapidly enough to prompt significant rate cuts in the first half of 2025. However, this will potentially change by the second half of next year, which could get velocity to more normal levels in 2026. Not to the unsustainably high levels of '21 and '22 but to a more healthy volume for our industry."
Reasons for Optimism
Looking ahead, industry experts and analysts back up Roessler's optimism about the apartment sector's future.
CoStar says that high interest rates, spiking material costs and a decrease in construction lending are pumping the brakes on new construction starts. "This trend is expected to result in a significant slowdown in deliveries toward the end of 2024 and into 2025," the firm says in a recent report.
Jay Parsons, head of investment strategy and research at Madera Residential, echoed similar sentiments in a recent LinkedIn post, writing: "Supply is doing what supply is supposed to do. It's putting downward pressure on rents amidst a high-demand environment, but that story will change as we get into 2025-26, as the recent plunge in new starts gives way to a plunge in completions."
A decrease in new supply should allow operating fundamentals to stabilize and then to improve. National annual rent growth could reach 2.7% and the national vacancy rate should plateau by the end of this year, CoStar says.
One reason for Roessler's bullishness on apartments as investments is that he expects renter demand to remain strong for the foreseeable future.
"That's caused by a couple of reasons," he said. "The first is the inability to buy a home as easily as you once could. With mortgage rates where they are, potential homeowners' buying power has been significantly reduced. The second reason is more of a generational change and how renting is perceived.
"When I was younger and before that, renting was just something you had to do before you bought a home. That has really changed. A lot of people have become renters-by-choice. Consequently, they care much more about the quality of their apartment community because they don't see it as a short-term option. They see it as a long-term option, and that works well for the quality of product that we deliver. We focus on best-in-class customer service, high-end apartment renovations and providing a strong sense of community for our residents through events and social engagement."
Ashcroft Capital's Plans
Founded in 2015, Ashcroft Capital has grown significantly in the nine years since its launch and now owns apartment communities totaling $2.6 billion in value.
In the current environment, the firm is "being selective" about acquisitions, according to Roessler.
"Property values are down, but that doesn't mean we will just buy anything," he said. "We are seeing strong opportunities to acquire great properties at great risk-adjusted prices right now. We look at now as a moment in time before volume likely picks back up again in 12 to 18 months."
Regardless of overall market conditions, Ashcroft is committed to maximizing the performance of its assets, Roessler adds.
"Our mandate is to run great communities, to attract and retain residents by showing them tremendous care and support," he said. "If we do that, the investment will take care of itself."
