Apartment Supply Overhang Keeps the Sun Belt Running Last in the Rent Growth Race
Louisville, Kentucky, has led the Midwest as the surprising market leader in multifamily rent growth over other parts of the country. Louisville apartments posted an average annual rate increase of 5.1% with a vacancy rate of 7.0%.
The Midwest has emerged as a surprising leader in apartment rent growth, a trend that began at the end of 2022 and is projected to continue through 2025. This shift marks a significant change in multifamily rental market dynamics, particularly in comparison to the once-dominant Sun Belt region.
Historically, the Sun Belt outperformed the Midwest in rent growth, with the former enjoying an average 100 basis point advantage in annual rate growth over the two years preceding the pandemic. This gap widened to a staggering 790 basis points by the end of 2021.
However, the landscape began to shift dramatically in 2022 and 2023. The Sun Belt experienced a surge in new housing supply just as demand started to wane, leading to a rapid decline in asking rent growth. In contrast, with its slower-but-steady approach, the Midwest saw a more modest increase in new supply, which better matched the region’s steady demand.
The differential impact on vacancy rates between the two regions is striking. Since its record low of 5.4% reached in the third quarter of 2021, the Midwest’s apartment vacancy rate has only risen by 190 basis points, reaching 7.3% in the second quarter of 2024. Meanwhile, the Sun Belt’s apartment vacancy rate has soared by 550 basis points, from 5.7% to 11.2%. This stark contrast in vacancy has significantly influenced rent growth outcomes.
Despite decelerating from a peak growth rate of 7.3% at the beginning of 2022 to 3.0% in mid-2024, the Midwest’s rent growth remains robust compared to the Sun Belt’s, where rent increases have plunged from an average of 14.8% to -1.0%. The Midwest’s current rent growth of 3.0% also far exceeds the national average of 1.0%.
A closer look at the top 50 US multifamily markets reveals the extent of the Midwest’s performance. As of the end of May, six of the 10 leading markets in rent growth were located in the Midwest, while all 10 of the poorest-performing markets were in the Sun Belt. The current market leader, Louisville, Kentucky, recorded an average annual rent growth of 5.1% with a vacancy rate of 7.0%. That stands in stark contrast to Austin, Texas, which saw a negative rent growth of 5.2% and a vacancy rate twice that of Louisville’s.
Even Minneapolis, the Midwest market with the lowest rent growth, posted a modest 1.1% growth rate, which is still just above the national average. This resilience highlights the Midwest’s relative stability and attractiveness in the current economic climate.
In addition, the Midwest appears well-positioned to maintain its leading role in rent growth. With the region nearing equilibrium in terms of supply and demand by mid-2024, it is poised to see a renewed expansion in rent growth in the latter half of the year. This trend is expected to solidify the Midwest’s top spot for rent growth through the rest of this year and 2025.