JRE - U.S. Real Estate Spring 2024 Report: Four Quadrant Perspectives

2024-05-10 08:35:00 ET

Summary

• The apartment sector continues to experience deterioration in market fundamentals, primarily due to oversupply in Sunbelt metros.
• Demand has remained largely positive, but is not strong enough to offset record deliveries.
• Liquidity remains constrained, but is generally favorable relative to other sectors today.
• The longer-term outlook remains positive despite nearterm headwinds.

Sector conditions and outlook

Sector conditions and outlook continued

Sector overview

The apartment sector continues to experience deterioration in market fundamentals, primarily due to oversupply in Sunbelt metros. Demand has remained largely positive, but is not strong enough to offset record deliveries. Liquidity remains constrained, but is generally favorable relative to other sectors today. The longer-term outlook remains positive despite nearterm headwinds.

Private equity

The apartment sector remains a favorite among private equity investors despite capital market dislocations and rising vacancy rates due to pockets of oversupply— particularly in Sunbelt markets. Despite the erosion in occupancy rates due to high levels of supply, demand has remained positive across most markets. The high cost of debt capital has continued to weigh on investor demand through the first quarter of 2024.

Transaction volume in the apartment sector has declined by 25% through the first three months of the year due to pricing uncertainty and the lack of debt capital available to investors. Although the sector continues to benefit from liquidity through government sponsored enterprises (GSEs), investors remain deterred by the rising cost of leverage at a time when values are in decline. Upward pressure in cap rates, IRRs, and exit caps have continued to filter through apartment valuations early in 2024, but as interest rates have stabilized, the transaction market is showing nascent signs of stabilization relative to last year.

Deliveries will continue to add to supply throughout 2024 and into 2025. It is taking time for higher costs of capital to slow development activity, and supply relief is unlikely to arrive until 2026. Rent growth is likely to remain tepid until that time, as demand struggles to keep up with the wave of construction deliveries. The positive news for apartment owners is that over the medium-term landlords should experience a period with significantly reduced deliveries and increased pricing power as prohibitively high costs of homeownership and a desire for more space in a post COVID world will help drive rental demand....

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