Rental Demand Strong, but Supply Overhang Delays Recovery

The thesis that rental demand remains structurally strong while supply overhang delays a full recovery is well-supported by current market data. The U.S. multifamily market enters 2026 at a pivotal inflection point. **Supply Dynamics:** Multifamily construction peaked in 2024 at a 40-year high (700,000+ units), with 2025 completions down ~20% but still the second-highest since 2008 (~550,000 units). The pipeline is contracting sharply — units under construction are down 53% from the 2023 peak. Completions are forecast to fall to ~372,000 in 2026 and bottom at ~327,000 in 2027, setting up a supply-constrained environment by 2027-2028. **Demand Fundamentals:** Rental demand is structurally supported by multiple factors: (1) The homeownership affordability gap remains extreme — owning costs 2x+ monthly renting, with only 12.7% of renters able to afford a median-priced home; (2) The 25-34 age cohort continues expanding through peak household formation years; (3) Q1 2025 saw record absorption of 138,000 units, the strongest in 30+ years; (4) Lease renewal rates near 55% are well above historical averages. **Vacancy & Rents:** National vacancy sits at 7.3% to start 2026 — a record high — with rents down 1.4% year-over-year. Median rent has fallen 6.2% from its 2022 peak to $1,353. However, vacancy is believed to be at or near its peak and should gradually decline through 2026 as supply moderates. Rent growth of 2.0-2.3% is projected for 2026. **Regional Divergence:** Performance varies dramatically by market. Supply-constrained Midwest/Northeast markets (Chicago, Philadelphia, NY, Boston) are outperforming with 4-5% rent growth. Sun Belt markets (Austin -6.3%, Atlanta 14% vacancy) face continued oversupply headwinds but are stabilizing. Sun Belt rent growth should return to 1-2% as deliveries moderate. **Key Risks:** (1) Immigration policy changes — the immigration boom of 6 million newcomers over two years is over, reducing a key demand driver; (2) Tariffs on steel, aluminum, and building materials (50%) are raising construction costs but paradoxically supporting existing asset values; (3) Youth unemployment for renters aged 20-28 rose to 7.4% vs 4.4% nationally; (4) Job growth slowed from 500K (Jan-Apr 2025) to 193K (May-Sep 2025). **Investment Implications:** Apartment REITs (EQR, AVB, MAA) are positioned for recovery. EQR trades at moderate buy consensus with 96%+ occupancy. MAA faces easing supply headwinds (new deliveries down 60% from peak). Multifamily transaction volume is up 7.2% YoY at $76.1B, with GSE lending caps up 20.5%. Cap rates stable at 5.7%. The thesis is validated: demand is strong, but the supply overhang creates a 12-18 month delay before fundamentals fully normalize, making 2026 a transitional year and 2027-2028 the recovery sweet spot.