The US has more fancy apartments than it is able to fill

America faces a significant housing shortage—but not for the type of apartments real-estate investors have been building at record rates.

The national vacancy rate for multifamily apartments reached 8% in the last quarter of 2024, higher than pre-pandemic levels. This increase in empty units is surprising, given estimates that the U.S. housing market is short by 1.5 million to seven million units.

One key issue is a herd mentality among developers, who have concentrated on constructing high-end apartments in the same cities. Investors have favored four-star and five-star units, which command average monthly rents of $2,139.

This strategy has financial logic: rising construction and land costs require high rents to ensure acceptable returns. However, it has led to a surplus of luxury apartments that are unaffordable for many renters. Vacancy rates for high-end units have climbed to 11.4%, according to CoStar data—double the vacancy rate for more affordable properties.

Sunbelt cities, such as Austin, Texas, have particularly high oversupply, with vacancy rates reaching 15%. To attract tenants, landlords are offering concessions like two or three months of free rent on a one-year lease. While these incentives don't show up as rent reductions, they amount to effective discounts of up to 25%.

In contrast, cities like Boston and Chicago, which investors largely overlooked during the pandemic, are showing greater resilience. New York City, with a 2.8% vacancy rate, remains one of the tightest rental markets in the U.S., as little new construction occurred between 2021 and 2024. Coastal cities and parts of the Midwest with muted construction are also experiencing rising rents.

Even cities that saw declines due to hybrid work are starting to recover. Equity Residential, an apartment owner, reported stronger rental demand in downtown Seattle following Amazon’s decision to require employees to return to the office five days a week. The company expressed optimism about raising rents in San Francisco this year.