Rental Demand Ends Year at Strongest Level in Decades

The U.S. ended the year with the best fourth quarter for apartment demand in two decades with large Sun Belt cities driving the most traffic, though some high-priced coastal markets hit hard by the coronavirus pandemic initially now appear to be rounding the corner.

Despite the traditionally slower fall leasing months and a slowing economic recovery, apartment demand, or net absorption, in the fourth quarter of 2020 blossomed. Nationally, net absorption totaled more than 70,000 units in the fourth quarter. That led to the nation ending the year with the best fourth quarter for net absorption since 2000, beating out the previous record set in 2015. National fourth quarter net absorption has averaged about 45,000 units since 2015, while quarterly net absorption for all quarters in the same time period was about 77,000 units.

The strong fourth quarter numbers were likely a result of the unusually long leasing season induced by the pandemic. As the lockdown went into place during the second quarter, leasing activity ground to a halt across the country. But as lockdown orders lifted and society gained a greater understanding of the virus, apartment demand returned as tenants that were forced to delay leasing decisions in the early months of the pandemic either moved or renewed late in the year.

Dallas-Fort Worth led the country once again in the fourth quarter, with roughly 5,000 units of positive net absorption. This marked the third straight quarter it led the nation in apartment demand. Perhaps most impressively, the region posted its best fourth quarter net absorption since 2000.

Other consistent demand leaders, such as Houston and Atlanta, ranked in the top five for net absorption in the fourth quarter. Both cities trailed Dallas-Fort Worth, but Atlanta set a new market record for the fourth quarter, and Houston had its best fourth quarter for demand since 2012.

But fourth quarter demand also turned positive in many cities where it was negative in the months immediately following the onset of the pandemic. Falling rents helped stabilize the situation in many pricey coastal cities, as opportunistic renters likely sought out discounts in previously struggling regions. New York rebounded from two consecutive weak quarters, while Washington, D.C., and Boston each posted strong follow-ups to relatively robust third quarter performances.

Demand was also positive in Los Angeles, with the region recording roughly 2,400 units of positive net absorption after four straight quarters of negative demand.

Miami, Fort Lauderdale and Palm Beach in South Florida also had strong fourth quarters on a percentage basis. With financial companies opening new offices, the rebound in apartment demand is understandable and a welcome sign to local landlords.

Meanwhile, the situation in the Bay Area stabilized in the fourth quarter as San Francisco and San Jose saw relatively flat demand after big demand losses earlier in the year. But those areas still ranked in the bottom half of all major metropolitan areas for apartment demand in the final quarter of 2020.

Chicago was the only city that saw notable negative net absorption in the fourth quarter. The Windy City was also one of the few markets that underperformed its typical fourth quarter trend, which is is usually slightly positive.

The poor performance in the fourth quarter tipped Chicago into the red for the year. More people moved out of Chicago than moved in, one of only six markets nationally that saw that same trend, joining San Francisco, New York, Los Angeles, San Jose and the East Bay.

Dallas-Fort Worth, Atlanta, Houston and Phoenix were the top four metropolitan areas for net absorption last year. These four areas led the nation in nominal population growth in 2019, and internal research data heavily implies that once the Census releases new data at the city level, these markets will remain at the top of the list.

Other leaders included San Antonio, Denver and Charlotte, North Carolina, three cities that have continued to benefit from positive net migration trends from Northeastern, Midwestern and West Coast areas.

Looking forward, continued improvement in apartment demand will depend on the nation’s economic recovery as well as the speed and effectiveness of the coronavirus vaccine rollout.

While additional fiscal stimulus and an improving public health situation should boost economic conditions, leading to more demand for housing, record-low mortgage rates and a sharp increase in single-family home construction could serve as a drag for rental demand in the coming quarters.