The Economy

Recent data reveals that the U.S. real GDP increased at an annualized rate of 2.8% in Q3 2024. Although this is just below the 2.9% consensus forecast, it remains a strong performance. Year-over-year, GDP expanded by 2.7%, outperforming the 2.4% growth rate from the previous economic expansion (2010-2019). Consumer spending was robust, with real personal consumption expenditures (PCE) rising 3.7%, the fastest in six quarters, driven by a 6.0% increase in goods spending and steady growth in services (up 2.6%). Business investment showed mixed results, with a significant rise in equipment spending (up 11.1%), particularly in transportation and information processing, while residential investment declined for the second consecutive quarter due to higher interest rates and limited inventory. Despite strong consumer spending -signaling continued economic momentum heading into Q4- concerns remain over the Fed’s inflation battle, as core PCE rose 2.2%, above expectations. The economy is expected to grow at a slower pace moving forward, with core PCE inflation forecasted to gradually decline towards the Fed’s 2% target by next year.

Interest Rates
In response to inflation, the Federal Reserve lowered the federal funds target rate by 50 basis points in September and 25 basis points in October, with further cuts likely. While some inflation indicators remain slightly above the Fed’s 2% target, underlying price pressures seem under control. Meanwhile, the labor market has softened, with the unemployment rate rising to 4.1% in September from 3.7% in January. This shift requires the Fed to reassess its balance between employment and inflation control. Given strong economic growth and rising unemployment, the Fed is expected to adopt a more neutral monetary policy stance to prevent a recession and mitigate labor market risks. Further rate reductions, totaling 175 basis points, are likely by mid-2025.

Politics and Election
Although elections generally have a limited impact on long-term real estate trends, the 2024 election was unique in that housing was a central issue for both major candidates. With the election settled, attention now turns to the potential housing policies of the President-elect. Former President Trump has advocated for deregulation, aiming to reduce the cost of building new homes. A 2021 study by the National Association of Home Builders found that regulations accounted for 24% of the price of a new single-family home. Trump’s platform includes reducing regulations, opening federal land to housing development (mainly on the West Coast), and addressing high interest rates, which he views as a barrier to home sales. These policy proposals could help ease housing affordability issues over time.

National Apartment Market
New supply continues to dominate the national apartment market. Despite over 500,000 units being delivered in the year ending Q3 2024, national rent increased by 0.3% during the same period. This modest increase is noteworthy given the record volume of new deliveries. National occupancy remains strong, at 94.4%, slightly above Q2 2024. The U.S. apartment market absorbed a remarkable 192,649 units in Q3 2024, pushing annual demand to nearly 489,000 units—one of the highest absorption rates on record.

2024 is projected to mark the peak of the post-pandemic supply wave, with deliveries slowing in 2025 and dropping significantly in 2026 and 2027. This shift, coupled with steady renter demand, should drive strong rent growth through at least 2027.

Capital Markets
The “wall” of multifamily loan maturities continues to loom large, with an estimated $718 billion of multifamily debt maturing by 2026. Many borrowers have extended loan maturities, hoping for lower interest rates or improved operations that will allow for at least cash-neutral refinancing.

In Q3 2024, multifamily loan originations rose 22% over Q2 2024, totaling $75 billion, though this was still down 68% from the peak in 2022.  A potential drop in interest rates, along with the maturing loans, may boost capital markets activity and spur refinancing and investment sales in the multifamily sector.

Investment Sales
Multifamily investment sales volume declined to $35.8 billion in Q3 2024, a slight decrease from $38.8 billion in Q2. Year-to-date, multifamily investment sales have totaled $96.1 billion, up about 3% from 2023 but down 62% from the 2022 peak. As the capital markets stabilize and interest rates potentially decline, investment sales are expected to pick up, particularly as more multifamily debt matures in the coming years.

Summary
Economic growth in the U.S. remains solid, with real GDP growth of 2.8% in Q3 2024. While core PCE inflation rose 2.2% in Q3, concerns over inflation persist, but the outlook remains positive as the economy slows and inflation gradually aligns with the Fed’s 2% target. The multifamily market has experienced an unprecedented surge in new supply, with over 500,000 units delivered in the year ending Q3 2024. However, strong demand and a slowdown in new starts are expected to lead to stronger rent growth through at least 2027. Capital markets are stabilizing, with a notable increase in loan originations and a moderate decline in investment sales.

Ackermann Forecast

Simply put, supply and demand in multifamily housing has been unbalanced since around 2023 when a large amount of new apartment communities began to deliver throughout the country.  As noted, rent growth slowed or went negative in many regions while occupancy dipped.  Throughout this period of almost unparalleled supply – new demand has been able to soak up much of the new supply.  Due to a strong job market and the historic high relative cost of homeownership (Graph below), multifamily demand is projected to stay stable in the future while new supply will undoubtedly fall.        

Additionally, renter households may be less financially stretched than in previous years. The median rent to income ratio has returned to the pre-pandemic level of 22% – meaning renters are better positioned to absorb increased rents that will come with the decrease in supply.  These market dynamics gives us confidence in forecasting strong rent growth and occupancy through at least 2027.

Overall, potentially lower interest rates combined with stronger rent growth and stable occupancy will bode well for the investment sales market, especially as a record amount of multifamily debt matures in the next 24 months.  Well capitalized and established investors that have stayed active in the sales market will be in position to capitalize on these dynamics and deliver outsized returns to investors.