Investment Opportunities In the New U.S. Residential Market Cycle

Since the global financial crisis (GFC), the U.S. housing market has faced ongoing structural undersupply, significantly affecting investment dynamics. Persistent shortages have driven up rents and home prices, exacerbating affordability issues further intensified by increased demand during the pandemic, rising construction costs, and general inflation.

The roots of the current undersupply trace back to the GFC, marked by approximately 3.8 million foreclosures from 2007 to 2010. The resulting distressed housing stock sharply curtailed new home construction. From nearly two million units built in 2005, housing production collapsed below 500,000 units by 2009. Recovery only began in 2012, slowly rising to match late-1990s levels by 2021. Despite significant population growth, housing production today mirrors levels seen nearly 30 years ago, creating an estimated shortage of 1.5 to 2 million units, including 630,000 homes for sale and 830,000 rental units.

The affordability crisis has been heightened by historically high prices for for-sale homes. Pandemic-related factors, such as low interest rates, increased household formation, higher birth rates, and rising remote work preferences, further stimulated housing demand. Currently, purchasing a starter home is approximately 45% more expensive than renting the same property nationally, deepening the affordability divide.

Responding to robust rental demand, multifamily construction surged, with approximately 450,000 units delivered in 2024 alone, marking an 8% increase from the previous year. However, this increase primarily concentrated in high-growth Sun Belt markets such as Austin, Phoenix, and Nashville, attracting affluent households migrating from coastal gateway cities. The high-end nature of these new units and substantial higher construction costs during pandemic-related supply disruptions did little to alleviate affordability issues, even temporarily causing rent and occupancy softening in oversupplied areas. Multifamily operating expenses have escalated significantly, with a 21% rise in costs overall and a 71% spike in insurance expenses since 2021, resulting in disappointing short-term investment returns.

Despite these challenges, recent absorption rates indicate the supply wave has largely been absorbed. Vacancy rates, having risen to a historically normal 6%, are stabilizing as absorption has recently exceeded completions. For instance, Dallas saw strong absorption of over 29,000 units in 2024, significantly higher than Los Angeles. Gateway markets, particularly New York City, present a contrasting scenario. While initially subdued by pandemic shutdowns, demand has since rebounded significantly. Supply constraints due to regulatory and geographical factors have pushed New York's vacancy rate down to a historically low 1.8%, driven by strongdemand from young professionals, including roughly 490,000 college graduates arriving in recent years.

Looking forward, a significant reduction in future supply is anticipated, reflected by a steep decline in new building permits from a peak of over 740,000 annualized in Q2 2022 to approximately 433,000 by Q4 2024. Due to the lag between permitting and completion, reduced new housing stock will become evident from mid-2025 onwards, varying considerably by market conditions. For example, New York's supply constraints remain chronic, while Austin expects higher supply levels into 2026.

Investment dynamics remain notably impacted by monetary policy and banking instability, particularly within regional banks dominant in real estate lending. Multifamily debt originations dropped by 33% compared to 2021, and the number of active lenders has fallen by 42% since the Q4 2021 peak. Tightened loan-to-value ratios and high interest rates have further restricted available financing. Consequently, fewer lenders are offering higher-cost, lower leverage loans, significantly reducing new development and slowing property acquisitions and rehabilitations. Investment volumes have decreased dramatically, with well-capitalized asset owners hesitant to sell at reduced valuations. Meanwhile, distressed owners maintain a wait-and-see approach, hoping for future interest-rate reductions. However, the reality of prolonged higher interest rates may soon prompt asset transactions at appealing prices, often below replacement cost. Despite current dislocations, underlying housing fundamentals remain solid. Favorable demographic trends and ongoing affordability challenges are expected to sustain rental demand, particularly in multifamily and build- to-rent sectors. Reduced future construction, coupled with strong absorption rates, is anticipated to stabilize market dynamics, creating favorable conditions for attractive risk-adjusted returns on both property acquisitions and new residential developments.

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