The Apartment Supply Squeeze

The U.S. rental market is experiencing a significant transition, positioned between an unprecedented supply peak and a projected decline.

The market delivered approximately 600,000 multifamily units in 2024, representing the highest level in 50 years and a 34% increase from 2023. However, projections indicate that the U.S. requires an additional 4.3 million new rental units over the next decade to address its housing shortage. Simultaneously, industry forecasts suggest the market is already decelerating from its peak, with completions projected to decrease to approximately 346,000 units by the end of this year.

This confluence of factors creates both a unique inflection point and a significant opportunity for investors to potentially benefit from market dynamics in the form of above-average rent growth. We anticipate a supply constraint that could strengthen rental growth in 2025 and beyond.

In this article, we offer an analysis of today’s rental landscape and explore how a mismatch between supply and demand could drive rental growth and present a significant opportunity for investors in the multifamily market.

The Current State of New Apartment Supply

Developers have spent the last 12 months adding more multifamily units to the U.S. housing market than in any period since 1974. Most of this new supply has been Class-A properties and driven by robust construction activity in the Sun Belt and Mountain regions, where CBRE predicts that some markets will grow their inventories by nearly 20% in a three-year period.

The Projected Decline in Apartment Supply

According to a recent RealPage analysis: “A little over 576,700 units were delivered in the year-ending first quarter 2025. That was slightly below the all-time peak of 585,200 units from calendar 2024. From this point on, delivery volumes are scheduled to drop off for the next few years as developers wrap up the current pipeline of projects.” And, as we opened, completions are expected to decrease further to approximately 346,000 units by the end of 2025.

The industry has faced numerous challenges over the past 12 months, many of which could persist throughout 2025. Elevated interest rates and price inflation continue to impact the residential market. According to the National Multifamily Housing Council’s Construction Survey from December 2024, 78% of respondents reported construction delays, with 95% attributing these delays to permitting requirements and 68% citing economic feasibility constraints. Economic uncertainty was identified as a factor by 42% of respondents.

While the housing shortage can be traced to the 2008 financial crisis, when the U.S. experienced significant underbuilding, the increased demand for affordable homes has been amplified by immigration levels, population growth, and evolving housing preferences. These conditions set the stage for a supply crunch that could drive impressive rental growth.

How Declining Supply Could Drive Rental Growth

Approximately three-quarters of the nation’s 50 largest apartment markets experienced demand exceeding concurrent supply in 2024. Among these, five markets recorded excess demand of more than 3,000 units.

Economic principles suggest that when supply contracts while demand expands, prices increase. For the rental market, this dynamic presents potential opportunities for investors to realize stronger returns.

In the context of the U.S. multifamily rental market, construction starts are projected to be 74% below their peak and 30% below their pre-pandemic average. As the construction pipeline diminishes, strengthened renter demand may contribute to lower vacancy rates and facilitate above-average rent growth.

Why Class-B Apartments Stand Out

Class-B multifamily apartments appear particularly well-positioned, and according to the Wall Street Journal, firms have already begun acquiring multifamily assets in substantial volumes—signaling a broader market recovery. This includes private-equity firm KKR, which invested $2.1 billion for more than 5,200 apartment units across the country. Class-B apartments typically represent older, mid-tier buildings without premium pricing. They generally face reduced competition and maintain tighter occupancy, factors that could enable this sector to experience accelerated rental growth.

Class-B apartments have demonstrated consistent performance advantages. Markerr’s rent data indicates that B-quality apartments outperformed their luxury A and A+ quality counterparts by approximately 15 basis points and 25 basis points in recent years, while RealPage’s 2023 report showed Class-B occupancy rates frequently surpassing Class-A in certain markets due to lower turnover rates.

With urban migration returning to pre-pandemic levels and individuals over 55 joining young professionals in preferring more practical, cost-effective accommodations over luxury options, the Class-B multifamily market appears well-positioned for growth this year and potentially offers compelling returns for stakeholders.

The Investment Opportunity in Class-B Today

Investors find themselves at a critical juncture between 2024’s supply peak and the projected decline. Strategically investing in Class-B apartments before the full impact of supply constraints materializes could position investors for enhanced returns—presenting an opportunity to acquire assets under favorable terms before the market fully adjusts to new conditions.

Investors are optimistic about 2025 as a rebound year for this segment, with unique opportunities such as these, poised to restore its status as the preferred asset class in commercial real estate.

For a discussion about navigating the multifamily market in 2025, get in touch with our investments team here.