Market Report
U.S. Apartment Concessions on the Rise, but
Forecast Predicts a Decline
Market Alert For
Accredited Investors
Overview
The U.S. apartment rental market is going through important changes, with shifts in supply, demand, and economic factors impacting how rental incentives—known as concessions—are being offered. Concessions, like one month of free rent or waived security deposits, are typically used by apartment owners and property managers to attract or keep residents in competitive times.
Recently, the number of apartment units offering these incentives has risen, with over 20% of units providing some form of concession by mid-2024. However, this trend may be short-lived. As market fundamentals strengthen, the forecast suggests a potential decline in concession levels over the coming year. This report provides a detailed look at why these changes are happening and what they mean for the future of the rental market.
Current Concession Trends
In Q2 2024, concessions were offered by one in five professionally managed apartment units across the country. This increase in incentives has been driven by a surge in new apartment supply as developers respond to a high demand for housing. As more apartments become available, property managers are turning to concessions as a strategy to stand out in a competitive market and fill vacancies quickly.
This trend is a common market response during times when there is an increased supply of rental units. As new housing continues to open, particularly in urban areas, the use of concessions becomes a way for property managers to attract residents amidst heightened competition. This strategy seeks to keep vacancy rates stable, even when supply temporarily outpaces demand.
Historical Perspective on Concessions
The use of concessions as a leasing tool is closely linked to the broader economic cycle. In times of economic downturn, concessions have typically spiked. For example, during the Great Recession, the number of units offering concessions reached its highest recorded level, with about two-thirds of U.S. apartments offering incentives by the end of 2009. The economic uncertainty and lower renter demand due to fewer household creations led property managers to aggressively use concessions to attract residents.
However, during economic growth periods, concessions generally decrease. Between 2010 and 2019, for instance, the average concessions offered dropped significantly, averaging just 4.6% of the asking rent, roughly half of what was seen during recessionary periods. This drop reflects the greater demand for apartments when the economy is strong, reducing the need for extra incentives to secure residents.
Occupancy Rates and Concessions: A Long-standing
Inverse Relationship
Occupancy rates, or the percentage of rented units in the market, have a significant impact on concession trends. Generally, when occupancy rates are high, the need for concessions decreases. For example, in 2022, when national occupancy rates hit over 97%, concession rates dropped dramatically, with only a small portion of apartments needing to offer incentives.
In contrast, when occupancy rates dip, as they did in mid-2024 (down to 94.2%), concessions become more common. This inverse relationship between occupancy and concessions has been observed for decades. Higher occupancy signals strong demand, meaning property managers don’t have to offer as many incentives to keep their units filled.
Forecasts for the end of 2024 and into 2025 suggest that occupancy rates may increase, which would likely lead to a corresponding drop in concessions. As occupancy rises, property managers may feel less pressure to use incentives as a leasing tool, creating a more stable rental market with fewer concessions.
Looking Forward: Expected Decline in Concessions
The forecast for late 2024 into 2025 predicts a likely decline in apartment concessions, with several factors contributing to this outlook.
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Strong leasing activity is expected to drive occupancy rates higher, meaning more residents are anticipated to move into available units without needing incentives. Net absorption—the total number of rented units minus vacated units—is forecasted to outpace the rate of new unit deliveries, which will support higher occupancy and reduce the need for concessions.
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The number of new apartments coming onto the market is expected to slow down slightly in the near term, further balancing the supply-demand equation. With fewer new units competing for residents, property managers will have less need to rely on concessions.
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The housing market remains highly competitive, with single-family listings still below pre-pandemic levels and mortgage rates high. Many prospective homebuyers are delaying purchasing homes and choosing to rent instead, increasing demand for apartments. This is especially true for residents looking for affordability and flexibility while they wait for a more favorable time to buy.
These factors together create a scenario where demand for rental units may continue to rise, occupancy rates will likely improve, and apartment operators may find less need to offer concessions to attract residents.
Key Takeaways for Accredited Investors
Understanding the Latest
Market Movements
Concessions are a strong indicator of market health and demand. High concession levels can indicate a softer market with a higher supply of available units, while lower concessions suggest a tighter market with stronger demand.
Investment Strategy in
High-Occupancy Markets
Markets with consistently high occupancy and minimal concessions are typically more stable and can be attractive for investment due to their lower turnover risk and steady rental income.
Why Now is
the Time to Invest
Investors should monitor regional concessions as job growth, population shifts, and housing availability impact trends. High-demand urban areas may see lower concessions due to strong occupancy.
Conclusion
The landscape of apartment concessions in the U.S. is shifting, with recent increases attributed to competitive pressures and an increase in housing supply. However, as occupancy rates improve and demand remains steady, concessions are expected to decrease.
Accredited investors in the multifamily sector can use these insights to make informed decisions, assess regional trends, and identify markets poised for growth or stability. These dynamics emphasize the value of monitoring occupancy and concession rates as indicators of both risk and opportunity in the real estate investment landscape.