Why is 2025 Likely to Have Strong Apartment Demand if Job Growth Has Slowed?

Demand surprised to the upside in 2024, with a calendar year figure totaling nearly 667,000 units absorbed. The expectation is that this should carry forward into 2025, even if the pace of absorption diminishes slightly due to the likelihood of slowing new deliveries.

Moderating job growth is a potential demand concern going into 2025. Indeed, job growth slowed throughout the year, and job growth is often seen as the most important driver of housing demand. Yet, 2024 defied these expectations – as shown by the remarkable absorption total. Still, both quantitative (e.g. exogenous variables in the forecast model) and qualitative (influences not directly captured by regression models, but real world influences that affect demand) factors are worth considering.

[Related: Read our coverage of employment data here.]

Demand Driver #1: Slowing (Though Still Positive) Job Growth

• U.S. annual job growth in 2025 is forecast to total slightly more than 1 million additional jobs, or 1% growth, according to RealPage. While this is slightly below prior year outcomes, positive job growth remains a driver in demand (and therefore rent growth) expectations.
• Further, there is potential upside in economic growth should some sectors (e.g. Information; Professional/Business Services; and Financial Activities) being to see rebounding job growth as the cycle of interest rate cuts has now begun.

Demand Driver #2: Improving Affordability Helps Spur Household Formation

• RealPage Market Analytics data shows rent-to-income ratios continued to trend down in 2024, reapproaching pre-COVID levels of roughly 22% last seen in early 2020. As a result, this may allow for the release of pent-up demand. This is also proven out by the drop in average number of residents per new lease agreement, which decreased to 1.42 residents per agreement in 2024 compared to 1.46 residents in 2023.
• This trend has been driven by two influences: continued wage growth and modest rent growth. Wage growth (still slightly above historic norms) has outpaced rent growth in each of the past six quarters (starting in 3rd quarter 2023) as rent growth remains below historically normal levels.

Demand Driver #3: Single-Family Market Fundamentals Remain a Multifamily Tailwind

• Several proxy measures support the idea that demand attrition into the single-family arena is well below historical levels. Quarterly REIT earnings calls suggest that the reported percentage of move-outs to single family ownership is down about 50% from previous cycle norms (with some variation across REIT portfolios).
• Single-family home prices are up nearly 50% since the start of 2020, whereas rents are up approximately 29%. The difference in appreciation between home prices and monthly rents appears to be pinning in some demand within rental housing.

Demand Driver #4: Consumer Sentiment Improves – Especially as Inflation Pressure Eases

• Changes in consumer sentiment are highly correlated with changes in apartment absorption. In simple terms, as consumers feel better about their economic prospects, there is an accompanying improvement in household formation and consumer spending.
• As of late 2024, consumer sentiment hit its highest rate since early 2021. The movement in consumer sentiment in the 2020s cycle appears to be closely aligned with the Consumer Price Index (inflation). Increasing inflation decreases consumer sentiment and vice versa. With sentiment at a three-year high at the end of 2024, this should help spur continued apartment absorption.

Demand Driver #5: Improved Resident Retention Means Fewer Units Needing Backfilled

• Though demand is synonymous with absorption in a technical sense, it’s sometimes useful to think of absorption as a quantitative measure and demand as a more holistic summation of the state of the market. Demand, therefore, can be assessed in two ways: new leases and renewals.
• Renewals ticked up roughly 2% in 2024. The larger-than-expected share of residents electing to renew in 2024 means that occupancy’s baseline was effectively increased. After all, more retention means fewer move-outs. With fewer move-outs, any increase in new leases signed contributes to overall aggregate demand.
• Meanwhile, new lease traffic has increased as a result of the aforementioned demand drivers, alongside some ancillary factors such as increased concession utilization. In these cases, concessions may be stimulating traffic to individual properties.