Apartment demand in 2026 is the third-highest on record
Rental Demand Continues To Surprise To The Upside
Summary
Apartment demand in 2026 is the third-highest on record, with 452,000 new apartments rented in the first nine months. Over the trailing four quarters, absorption has overtaken new supply, pushing national occupancy to 95.5%. Renter household formations exceed 600,000 annually, driven by high home ownership costs and rising mortgage rates.
Meanwhile, new apartment construction is dropping significantly from its previous peak levels. This combination of strong demand and shrinking supply is setting the stage for increased occupancy and rent growth.
The early third-quarter numbers are in, and they are extremely encouraging for those in the rental property business. Data from Apartments.com (a subsidiary of CoStar) now show that year-to-date apartment demand in 2026 is the third-highest on record, behind only the boom year of 2021 and the supply-fueled surge of 2024.
A whopping 452,000 new apartments got rented in the first nine months of 2026. This year is going to end up one of the very strongest on record, and in some geographies, absorption will be the strongest ever. Finally, more apartments are getting leased than completed.
Yardi Matrix similarly reports that third-quarter performance has improved, with occupancy rising as newly-built apartments got filled up. RealPage puts national occupancy at 95.5%, up 90 basis points in the first eight months of the year after sliding through the back half of 2025. Other data providers are corroborating the strong absorption numbers for 2026, although each group has its own figure.
This point is key: over the trailing four quarters, absorption has finally overtaken new supply. This lays the groundwork for a significant improvement in rental property performance over the next few years.
Rental housing demand is holding up surprisingly well (even Costar/Apartments.com was surprised by their latest reading) in spite of a tepid job market. I’ve had my eye on the strong demand, amid declining new completions, for a while now, and I want to explain why all of this is happening, because the reasons behind it are what make the outlook for rents so interesting.
Renter household formation is doing the heavy lifting
“Absorption” is the number of rental units we see getting leased. The demand that supports that pace is measured by the number of renting households that get formed. Renter household formations are estimated to be running over 600,000 annually, comprising nearly 60% of all household formations, so the absorption pace we are seeing in the market makes sense from a demand standpoint. As noted at the top, 452,000 rental units got leased in 9 months, so if you annualize that, just arithmetically, you get 603,000 for a full year. That’s pretty close to the household formation rate.
Why are so many households choosing, or being pushed into, renting? I see five reasons, and they reinforce one another.
First, owning a home costs far more each month than renting one. Zillow’s latest numbers show the typical renter paying $1,066 a month less than a new buyer of a typical home: $1,948 in rent against a $3,014 mortgage payment including taxes and insurance. That’s almost $12,800 a year.
A household needs about $78,000 in income to comfortably afford the typical rental, but more than $120,000 to afford the typical home with 10% down. Renting now beats buying on monthly cost in every one of the nation’s 50 largest metro areas.
Second, mortgage rates are moving the wrong way for would-be buyers. Freddie Mac’s 30-year fixed-rate average hit 7.28% on October 1, the highest since late 2023 and nearly a full point above where it was a year ago. Every leg up in rates pushes another group of marginal buyers back into the rental pool, or keeps them there.
Third, renters are staying put once they find a rental home they like. Fewer residents are leaving rentals in order to buy, and that boosts net absorption because occupied units don’t turn over into vacancies. RealPage notes that Class A turnover in the South is running much lower than usual as residents stay longer, partly because the gap between owning and renting is so wide. The lock-in effect on the ownership side, where half of outstanding mortgages carried rates below 4% as of late 2025, keeps existing homes off the market and keeps prices high. That makes the problem worse for first-time buyers.
But I want to be careful here, because “it’s just low move-outs” has become a lazy way to dismiss strong demand. 2021 was a booming year for home sales and also a record year for apartment absorption. Low move-outs help. They can’t create several hundred thousand net new renter households on their own.
Fourth, there’s a large reserve of young adults still living at home. Roughly 22% of 25-to-35-year-olds live with a parent or other relative, according to an RBC Economics analysis, well above the levels of the early 2000s. RBC estimates that a two-point drop in that share would unlock about 675,000 households of new demand, and that about two-thirds of it would go into rentals. I don’t see these young adults as lost demand. They’re deferred demand. Every month of steady employment and modest rent growth lets some of them move out, and they almost always move into a rental first.
Fifth, the generational math works in our favor. Generation Z is a cohort of roughly 70 million Americans, and its oldest members are now in their mid-to-late twenties. That’s the classic age for starting a first job, leaving home, and signing a first lease. Even in a weak hiring market, more and more of them are reaching peak renting age each year.
Yardi Matrix
And it’s important to add an affordability note here. When it comes to institutional-grade apartments and dedicated single-family rental communities, renters are only spending 21% to 22% of their income on rent, which is far below the 30% level that is considered to be concerning. What that says is that the upper half of the apartment market (and the vast majority of the new-development portion of the rental market), renters are financially able to handle the rent increases that are coming.
Class-A is leading the recovery
If you want to know where the demand is going, look at the top of the market. Apartment demand is moving upmarket, and the gap between product classes is as wide as I’ve seen it.
RealPage data show stabilized Class A properties posting about 1.9% annual rent growth this summer, while Class B rents were roughly flat and Class C rents were down about 2%. The pattern holds in every region. In the South, Class A rents rose 0.3% in the year ending in the second quarter while Class C rents fell 4.5%, the deepest Class C cuts since the Great Financial Crisis. In the West, Class A rents rose 2.5% and Class C fell 2.4%. In the Midwest, Class A grew 3.0% against 0.5% for Class C.
Concessions tell the same story. In August, RealPage found concessions on 12.9% of stabilized Class A units versus 19.7% of Class C units. Earlier this summer, Class A was the only segment where concession use was down from a year earlier. Across Cushman & Wakefield’s own managed portfolio of 144,000 units, Class A occupancy was up about 38 basis points from a year ago, and leasing activity rose 19%, with the biggest gains at the top of the quality spectrum.
The explanation isn’t complicated. The renters forming households right now are mostly employed, often well paid, and in many cases would-be homebuyers who can’t make the ownership math work. They’re choosing new, amenity-rich communities in good neighborhoods, and the lease-up wave gave them plenty of choices at discounted prices.
At the lower end, the renter base is under real strain from inflation in food, energy, and insurance, from a soft entry-level job market, and from the immigration slowdown. This is a K-shaped rental market. For owners and investors, quality and location matter more than ever.
The supply cliff is already here
This is the part of the story I find most important for anyone underwriting rental housing over the next three years.
The wave of new apartments that hit the market in 2023 through 2025, the largest in roughly four decades, is receding fast. Census Bureau data show completions in buildings with five or more units ran at an annualized pace of 302,000 in August, down 36% from 470,000 a year earlier.
RealPage counts about 340,000 market-rate units delivered in the year ending in the second quarter, down from a peak of nearly 588,000 in late 2024. That’s the first time in three years that annual supply has fallen below the decade norm.
The pipeline behind those deliveries is thinning out even faster. CoStar reported first-quarter starts of about 55,000 units, the lowest quarterly total since 2011 and 73% below the early-2022 peak. Cushman & Wakefield puts the under-construction pipeline at roughly 475,000 units, just 3.5% of existing inventory. That’s half the early-2023 peak share and the lowest since 2013.
What declining completions plus strong demand means for rents
When demand stays healthy and new supply drops by a third or more, the arithmetic leads to one place: higher occupancy first, then pricing power.
We’re already in the early stages. RealPage reported 2.8% year-to-date rent growth through August, the best in several years, although seasonal softening in the fall will pull the full-year number back toward 2%.
Apartments.com measured annual rent growth of 1.5% in September, up from 1.0% a year earlier, and CoStar’s forecasters recently raised their fourth-quarter projection from 0.5% to 1.9%. Even Apartment List, the most conservative of the major indexes, shows annual rent change improving for five straight months from its April low.
My view is that 2026 is the turning point and 2027 is the year pricing power returns. RealPage’s forecast calls for national rent growth to get back to pre-pandemic norms in 2027, and I think that’s reasonable. The low-supply coastal and Midwest metros will likely run well above the national average, and the Sun Belt will follow with a lag. The biggest risk to that view is the job market. A real recession would cut into household formation. Barring that, the falling pipeline gives the market a lot of protection.
A tale of many markets
The national numbers mask an unusually wide spread across regions.
The Bay Area is the standout. San Francisco rents are up about 13% from a year ago, according to Apartments.com with San Jose up 8% and the East Bay up 5%. CoStar reports East Bay vacancy fell to 4.8% in the third quarter, from 5.9% a year earlier, as almost 3,000 units were absorbed against fewer than 500 completed. The combination of an AI-driven demand surge and almost no new supply is about as close to a perfect setup for landlords as you’ll find.
The Northeast and Midwest continue to deliver steady, low-volatility growth. Apartment.com’s September data show annual rent growth of 2.4% in the Pacific region, 2.3% in the Midwest, and 2.2% in the Northeast. New York led the nation in first-half absorption, with about 19,500 units. Chicago is drawing development capital back after years of underbuilding. Rochester, Albany, Norfolk, and Midwest markets such as Youngstown and Champaign-Urbana are posting solid gains on tight occupancy. These markets never overbuilt, so they never had to dig out.
The Sun Belt is where the demand story and the rent story have been furthest apart, and where the turn is now happening. Dallas-Fort Worth, Phoenix, Atlanta, and Austin all ranked among the top five markets for first-half absorption. Austin’s vacancy fell nearly 300 basis points over the past year, and its annual rent trend swung by more than six percentage points between March and August, the biggest improvement in the country.
Raleigh’s vacancy dropped about 240 basis points. Rents in many of these markets are still below year-ago levels, with San Antonio, Las Vegas, Denver, and Houston among the weakest. But the direction has clearly changed.
In Florida, the picture is mixed. Jacksonville and Orlando posted the state’s strongest quarterly rent growth this spring as deliveries slowed and retention improved. The heavily supplied Southwest Florida markets, including Cape Coral, Naples, and North Port, are still working through rent declines in the high single digits. Even there, renter-pool growth is among the fastest in the nation. The Sarasota area grew its renter base by more than 4% in the first half.
The demand is real. These markets just need time for the supply to clear. Class-A apartments are up almost 7% for the year in the West Palm Beach market, according to RealPage, and Daytona Beach, Orlando, Jacksonville, Melbourne, Miami, and Tampa are now averaging rent growth of 2% – 3% in the institutional-quality buildings.
Concession burnoff: the hidden rent growth, and the catch
The most underappreciated source of income growth for apartment owners over the next 18 months may not be asking rents at all. It may be concessions going away.
Concessions are still widespread. RealPage found incentives on 15.4% of stabilized units in August, down for the third straight month from a peak of 17% in March and May. But the average discount is still about 11% of asking rent, close to the deepest on record and equal to almost six weeks free on a 12-month lease.
RealPage describes the current environment as “narrow and deep”: fewer units carry incentives, but the ones that do are still generous. Listing-based measures run even higher. Roughly two in five rental listings on Zillow offer some kind of deal. Realtor.com found concessions on 43.5% of listings in the 50 largest metros in August, and in Denver, Austin, Las Vegas, and Nashville the share topped two-thirds.
As occupancy tightens, owners can take those discounts back one lease at a time. Concessions have masked the gap between the asking rent and what renters actually pay. Each lease that rolls without a free month delivers income growth that the headline asking-rent indexes don’t fully capture. In Class A and in low-supply markets, that process is already underway. Cushman & Wakefield reports that concessions across its own managed portfolio fell below 2.5% in the second quarter.
Here’s the catch, and I want to be honest about it: renters have learned to expect concessions. After three years of “six weeks free” banners, a whole cohort of apartment shoppers treats a move-in special as standard. They comparison-shop for the deal, they negotiate, and they walk if they don’t get one. Property managers aren’t rushing to pull incentives even as rents rise, so concessions may prove stickier and harder to burn off in 2027 than owners and operators would like. Expectations don’t reset as quickly as occupancy does.
I think the burnoff will happen, but gradually and unevenly. It will start with renewals and stabilized Class A assets in tightening markets. Operators will move from big blanket discounts to smaller, targeted ones, like waived fees, a couple of weeks free on hard-to-lease floor plans, or specials timed to the slow winter months, before they drop concessions entirely.
Owners who budget for an overnight return to face rents in 2027 will probably be disappointed. Owners who model a lease-by-lease burnoff, matched to their own expiration schedules and local supply, will likely find upside they haven’t priced in.
The bottom line
Apartment demand has now outlasted every headwind the pessimists pointed to: the job slowdown, the immigration collapse, the sour consumer mood, and the biggest supply wave in half a century. The renters signing these leases are real households, forming for durable reasons. Owning is expensive and getting more so. Young adults are ready to move out. And a generation is aging into its prime renting years.
Meanwhile, the supply that held rents down is disappearing on schedule. Strong demand and a shrinking pipeline set up rising occupancy and, before long, renewed rent growth, starting at the top of the market and in supply-constrained metros and spreading from there. The concession habit will slow the transition, but it won’t stop it. For developers, lenders, and investors, the question is no longer whether the recovery is coming. It’s whether they’re positioned for it when it gets here.
Source: Forbes
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