Why Is Apartment Vacancy So High?

The Real Estate Espresso Podcast

Why Is Apartment Vacancy So High?

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Why Is Apartment Vacancy So High?

Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show, we’re taking a look at the latest market report from data analytics firm ALN. This report is hot off the press this week, and it shows a continuation of an overheated apartment market across much of the U.S.

This past year saw a vast improvement in the supply and demand relationship compared with 2024. This was partially due to a decline but was mostly due to a surge in apartment demand. The result was the first gain in national average occupancy since 2021.

Rent growth did not make the same progress. Leasing incentives continue to proliferate, but at a lower rate than last year. The question now is what does that all mean for 2026?

During the first half of this year, there were widespread reports of a significant slowdown in multifamily apartment starts. That picture has started to change in more recent months. ALN is tracking more than 820,000 units currently under construction. That’s a lot.

These units are in addition to the nearly 900,000 units in some phase of lease-up that were supplied last year. Those lease-up units are an important facet of the supply picture in addition to the upcoming deliveries. That means there’s about 1.7 million multifamily units either under construction or currently in stabilization.

Early in 2024, that number was closer to 1.9 million, so it’s a little better picture, but not a particularly different one from what it was a year ago. Another 3 million units is currently in a pre-construction phase. That’s equal to the number from early 2024.

Now, new deliveries next year are expected to be lower than in recent years. New supply is in the neighborhood of 420,000 units nationally, and that would be the lowest total since 2021, roughly 30% below the 2024 peak. It looked at one point as though 2027 might be another year with lower deliveries. Starts this year have been sufficient to make that eventuality unlikely. More than half a million units are currently anticipated to begin leasing in 2027.

So, net absorption did surprise to the upside this year, and the effects rippled through the industry. Since apartment demand actually beat expectations, it was on pace this year to beat 2021. The national average occupancy managed a net rate of gain rather than a small decline in the third consecutive year.

Now, rather than be concentrated in one subset of the multifamily sector, net absorption improved virtually across the board in all segments from Class A all the way down to Class D. That bodes well for next year.

On the other hand, there are some crosswinds that do make this picture murky. Outlier years for apartment demand are typically followed by a reversion to the mean. So, while this year could have been a hot year, we could see a slowdown.

Also, while net absorption has been robust, most leasing activity has occurred in the lease-up segment. Normally, a decrease in deliveries, as is expected next year, would show some effect on the net absorption. This means that if there’s vacancy, this vacancy is either going into smaller properties or it’s going to the junk in the market.

Now, there’s plenty of this lease-up backlog. It should continue to fuel leasing activity next year even as new deliveries reduce. Leasing concessions should be mentioned here as well. Unlike 2021, this year’s surge in absorption came alongside significant lease concessions, both in terms of availability and cost.

Leasing concessions have been above the pre-pandemic era for 15 straight months. When you look at the individual market numbers, about 22% of the properties were offering a leasing incentive, and the average discount was 8%, which is essentially the equivalent of one month free rent.

When I look at the national numbers, I’m left with a pit in the bottom of my stomach. Let’s look at a few of these, and these are not the worst by any means.

Fort Myers, Florida, which of course, as you remember, had a hurricane not long ago, was at 77.2% occupancy in November 2024. Today, it is at 82.6% at the end of November this year. That is a substantial improvement, but we still have nearly 1 in 5 units vacant. It’s hard to see how there’s any business case for building anything for a long while in Fort Myers.

Athens, Georgia, went from 83.1% a year ago to 90.8%. That is a substantial bump, but here too a 9% vacancy rate is still on the high side, at least it is in my opinion. It’s one of the better markets in the nation.

Places with traditionally high occupancy are also those with very little change in supply. So, some markets in the northeast, like Boston or like Rochester, New York.

Rochester, New York was at 96.1% last year, and it’s at 96.3% occupancy now. Very little change, but there’s also very little new supply.

Many of the Texas markets have attracted a lot of development. Houston and surrounding areas have always had higher vacancy rates due to the lower barrier to entitlement. Almost all of the major Texas markets are experiencing occupancies in the low 80s.

Now, where I live in Ottawa, Canada, we’re accustomed to vacancy rates in the 1–2% range. A 3% market vacancy is alarming.

Now remember, the numbers in the ALN data are confined to apartment complexes of 50 units or more, so that does not include properties below 50 units. I understand that some of the vacancy will go to properties that are functionally obsolete. But these numbers demonstrate the absorption risk that many properties have been experiencing.

I’ve included a link to the ALN data table in the show notes so you can look up the markets that are of interest to you.

As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk again tomorrow.

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