Redfin: New Apartments Filling Slowly, but Trend May Shift
A recent report from Redfin, a technology-driven real estate brokerage, reveals that newly built apartments are filling up at one of the slowest rates on record. Less than half (47%) of the newly constructed rental units completed in the third quarter of 2024 were leased within three months. This marks a continuation of historically low absorption rates, tying with the fourth quarter of 2023 for the lowest level recorded, aside from the initial period of the pandemic.
The slowdown in apartment absorption is largely attributed to an oversupply of rental units. A record-breaking 142,900 new apartments were completed in the third quarter, providing renters with an abundance of choices. While an increase in supply generally benefits tenants by keeping rental costs in check, it has created challenges for landlords, many of whom have resorted to price reductions and incentives such as free parking to attract renters. However, experts warn that these renter-friendly conditions may not last long.
“This trend of incentives and lower rents may be temporary,” said Redfin Senior Economist Sheharyar Bokhari. “Builders are pulling back, with permits to construct new apartments dropping nearly 10% year-over-year. As fewer new developments enter the market, the supply will eventually shrink, giving landlords more leverage to increase rents. That shift may not occur immediately, but by late next year, we could see a stronger rental market in favor of property owners.”
The Post-Pandemic Rental Market Shift
The COVID-19 pandemic caused a surge in rental demand, leading to rapid apartment absorption and sharp rent increases. In response, builders ramped up construction to capitalize on the hot market, resulting in an influx of new rental units. However, as demand began to stabilize, this boom in construction left the market with more apartments than tenants seeking to rent them. By the end of 2024, the rental vacancy rate for buildings with five or more units had climbed to 8.2%, the highest level since early 2021.
This oversupply has kept rent growth modest. The median U.S. asking rent stood at $1,607 in Q4 2024, representing a slight 0.4% year-over-year increase. However, it remains approximately $100 below its peak levels seen during the height of the pandemic-driven rental frenzy. Unlike in 2023, when rents were experiencing declines, the market is now witnessing slow but positive price growth. Still, the current increases are a far cry from the double-digit annual rent hikes seen just a few years ago.
Variability in Rental Absorption Across Unit Types
Despite the sluggish rental market, studio apartments have been faring slightly better than larger units. The absorption rate for newly built studio apartments in Q3 2024 was 50%, an improvement from 42% in the same period the previous year. This suggests that demand for smaller, more affordable living spaces remains relatively steady. One potential reason for this is the limited availability of new studio apartments compared to larger units. While completions of one-bedroom and two-bedroom units surged by 78.8% and 85.6%, respectively, the number of newly built studios increased by just 0.4%.
By contrast, the absorption rates for larger apartments declined year-over-year. The absorption rate for one-bedroom apartments dropped from 54% to 49%, while two-bedroom units saw a modest decline from 51% to 50%. Three-bedroom and larger apartments followed a similar trend, with absorption rates decreasing from 56% to 51%.
Regional Trends in Rental Demand and Pricing
Redfin’s analysis also highlights regional differences in apartment absorption and rent trends. While some cities have struggled to fill new apartments, others have maintained steady demand. The highest rental price increases have been observed in metropolitan areas with strong job markets, growing populations, and limited new housing supply.
Conversely, regions with significant construction activity have experienced more difficulty in leasing new units. In cities where large-scale developments were completed during or after the pandemic, an excess of rental properties has led to slower absorption rates and reduced pricing power for landlords.
For renters, these conditions present an opportunity to secure better deals, at least in the short term. “Some landlords are slashing prices and offering concessions like free parking to woo tenants, but renters should know that these perks could start to dry up,” Bokhari cautioned.
Key Takeaways from Redfin’s Report
- Slower Apartment Absorption: Just 47% of newly built apartments were rented within three months of completion in Q3 2024, tying with Q4 2023 for the lowest rate on record (excluding the pandemic period).
- Oversupply Driving Renter-Friendly Conditions: With a record 142,900 new apartments hitting the market in Q3 2024, renters have more options, keeping rent increases modest.
- Incentives Still Common but May Fade: Landlords are offering discounts and perks like free parking to attract tenants, but these deals may disappear as supply shrinks.
- Studio Apartments Absorbing Faster: 50% of new studio apartments were rented within three months, up from 42% a year earlier. One-bedroom, two-bedroom, and three-bedroom units saw declines in absorption rates.
- Moderate Rent Growth: The median asking rent reached $1,607 in Q4 2024, up 0.4% from the previous year but still about $100 below its peak.
- Future Outlook: Fewer construction permits signal a slowdown in new apartment supply, which could tip the market back in favor of landlords in the coming years.
