Red Hot Apartment Investment Market Starts to Cool

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By David J. Petersen

Since before the pandemic, multi-family housing has been one of the hottest real estate investments in the nation. In the 2010s, the number of renters surpassed the number of homeowners in many U.S. cities, and fast-growing home prices have pushed more people out of the ownership market. Increased demand has driven rent growth, making apartments an attractive investment. Average annual returns from 1992 to 2017 on apartment investments was 9.75%. And at the same time, apartments are a relatively low-risk investment, with mortgage default rates at .02% compared to 6% for single family home mortgages during the Great Recession.

Recently, however, there have been signs of a decreased appetite for apartments among real estate investors. During the third quarter of 2022, net demand to rent apartments nationwide was negative, meaning more people moved out of apartments than moved in. The third quarter numbers drove net demand for the calendar year to date into negative territory as well.

Theories vary about why apartment demand has fallen so sharply. Since the late 2000s, rent growth has outpaced income growth, which may mean that more people are sharing apartments (or other living situations) rather than living separately. Cooling home prices in some markets where rapid price appreciation was not sustainable may also be luring some renters back into the home buying market. And with high inflation and other negative consumer confidence indicators, people may just be going into wait-and-see mode rather than making significant lifestyle changes.

The societal shift toward more remote work also may be rearranging the attractive markets for new apartment construction, and developers have not yet caught up. Prior to the pandemic, suburban markets of large Sun Belt cities like Houston, Dallas and Phoenix attracted most new apartment construction. But with remote work more available than ever, previously overlooked “lifestyle” markets like Eugene, Oregon, San Luis Obispo, California and the Lehigh Valley in Pennsylvania are starting to attract builders.

Accordingly, some analysts believe the slowdown in apartment construction and investment is just a blip on the radar. As American society settles into a new pattern of living, the rosy glow of apartment investing may return soon, particularly in markets attractive to home-based workers and with a limited supply of affordable for-sale housing. But a sustained economic downturn may keep consumer confidence low, depressing the demand for new apartments everywhere and thereby reducing the attractiveness of apartment investments.