The U.S. Multifamily apartment market is sending mixed signals. While fundamental conditions are weakening – marked by a surge in new supply and cooling rental demand – investor appetite for these properties is surprisingly robust. This disconnect is creating a unique dynamic, with some owners, like Camden Property Trust, strategically repositioning their portfolios.
Camden Property Trust, a top-10 real estate investment trust (REIT), recently began marketing its entire California apartment portfolio – 11 properties valued at approximately $1.5 billion – and has already encountered significant interest. “We have a huge demand for it right now,” Ric Campo, CEO of Camden, told CNBC. “Not two or three, but hundreds.”
The company’s move is driven by a strategic shift towards the Sun Belt region, where Camden already holds 90% of its properties. Campo believes that Sun Belt markets will offer stronger growth dynamics once they recover, which he anticipates will occur in . “We think the Sun Belt markets are going to…be better growth dynamic markets than California and our long-term cash flow growth, or net operating income growth, will be better concentrated in the Sun Belt than Southern California,” he explained, outlining the fundamental rationale behind the sale.
Interestingly, Campo attributes the current strong investor demand to the very weakness in market fundamentals. “You’ve had no rent growth, yet you’ve had wage growth, and so affordability for apartments across America has gotten better,” he said. He points out that sustained periods of flat apartment rents are historically rare, typically occurring only during significant economic downturns like the financial crisis. This leads the market to anticipate an eventual turnaround.
Fundamentals
Rental rates started on a downward trajectory, with the national median falling 1.4% year-over-year, according to Apartment List. This represents the largest annual decline since and the lowest January rent since . Currently, rents are more than 6% below their peak in .
The decline in rents is directly linked to rising vacancy rates. The national vacancy rate reached a record high of 7.3% in , based on Apartment List’s data dating back to . It now takes an average of 41 days to lease a unit, four days longer than in , also a record for the index.
“We’re past the peak of a multifamily construction surge, but a healthy supply of new units are still hitting the market and colliding with sluggish demand, causing vacancies to continue trending up,” said Chris Salviati, chief economist at Apartment List. saw the delivery of over 600,000 new multifamily units – the highest annual total since . While supply eased to 500,000 units in , is still expected to see above-average levels of new construction.
Salviati added that future market conditions will hinge on rental demand, which is increasingly uncertain given weakness in the labor market and broader economic anxieties.
Growing Investor Demand
Despite the softening fundamentals, investor interest in the multifamily sector – from private capital to REITs – is strengthening. Multifamily led all real estate sectors in deal-making during , according to Moody’s.
Mark Franceski, managing director of research and securities at Zelman & Associates, describes the situation as “a defining conflict.” He notes that trailing 12-month transaction volume has increased year-over-year for 14 consecutive months, even with capitalization rates remaining largely unchanged.
“We still believe in it as stable and steady, and the long-term outlook is good, but fundamentals and investors point to the same thing: weakness,” Franceski said.
Berkadia’s Multifamily Investor Sentiment Survey, which polled 249 investors, revealed that 87% plan to moderately or aggressively expand their multifamily portfolios this year, “demonstrating cautious optimism despite ongoing challenges.” A majority of investors (59%) anticipate moderate rental growth in the sector this year. The Southeast, Midwest, and Texas are projected to be the top regions for multifamily investment, driven by migration patterns, affordability, and favorable business environments.
The Play
The apparent disconnect between investor enthusiasm and weak demand can be explained by a forward-looking perspective. “They’re looking through the softness today to what they see as a better environment tomorrow,” said Samuel Sahn, managing partner and portfolio manager at Hazelview Investments, a Canadian firm with $11 billion in assets under management.
Sahn believes that private entities with longer investment horizons – typically five to ten years – are anticipating an upturn in household formation and a significant slowdown in multifamily construction starts, which will ultimately restore landlords’ pricing power.
Franceski emphasizes the importance of location. “I would treat [local] markets like stocks. It’s a market pickers’ market the same way the stock market is. People are hyperfocused on regions and markets,” he said.
Analysts examining Camden’s California exit also point to the impact of state regulations. “The positive is reducing exposure from a heavily regulated state versus CPT’s broader Sunbelt investment focus,” said Alexander Goldfarb, managing director and senior research analyst at Piper Sandler.
Campo defends the move, despite past concerns about overbuilding in California. “The regulatory construct in the Sun Belt is what drives Sun Belt growth. It’s pro-business. It’s a young population, a highly qualified workforce,” he stated.
Franceski also suggests exploring alternative niches within the multifamily sector, such as senior living and student housing, which benefit from favorable demographic trends. “Everybody’s got to live somewhere. The real focus is on solid operations and stability rather than growth industry,
” he said.
