Washington, D.C. — Recession fears and rising inflation are creating mounting uncertainty for the U.S. economy, raising alarm bells for the apartment industry, according to new analysis from the National Multifamily Housing Council (NMHC).
A sharp downward revision to the Atlanta Federal Reserve’s GDPNow forecast sparked fresh concerns this month, as the model shifted from predicting 3.9% growth for the first quarter of 2025 to a -2.8% contraction, before slightly rebounding to -1.8%. If accurate, this would mark the first quarterly economic contraction since early 2022.
Other forecasts are also trending downward amid growing anxiety over trade tensions, new tariffs, and declining consumer confidence. Goldman Sachs slashed its first-quarter growth estimate to 1.7%, while the New York Fed lowered its projection to 2.7%.
Meanwhile, financial markets are flashing warning signs. The NASDAQ fell 9.2% and the S&P 500 dropped 5.7% between late January and March 24. Consumer confidence has also plummeted, with the Conference Board’s index suffering its biggest monthly drop since 2021 and the University of Michigan’s sentiment gauge falling for a third straight month.
“Economic uncertainty is rising rapidly, and the apartment industry is watching closely,” said Chris Bruen, NMHC Economist and Senior Director of Research. “The severity of a potential recession will ultimately determine how deeply it impacts multifamily performance.”
If a recession materializes, the scale of the downturn will dictate its effect on the apartment sector. Bruen noted that the Great Recession (2007-2009) offers a sobering case study: GDP shrank over 4%, unemployment more than doubled, and the apartment industry suffered steep losses.
During that period, apartment vacancy rates climbed, rents turned negative, and returns plummeted. According to CoStar, rent growth fell from 4.5% in early 2007 to -4.1% by the end of 2009. Multifamily construction starts collapsed by more than 60% in 2009, contributing to a long-term shortage of affordable apartments.
“The construction slowdown during the Great Recession exacerbated the nation’s affordability crisis,” Bruen said. “Hoyt Advisory Services estimated that underproduction of housing caused the loss of 4.7 million affordable apartments between 2015 and 2020.”
Apartment investors saw unlevered returns fall to -8.3% in 2008 and -2% in 2009, while apartment REITs suffered even steeper losses, dropping nearly 29% in 2008.
The COVID-19 recession, by contrast, was severe but brief. GDP fell at a record pace in 2020, and unemployment surged, but federal stimulus and lower interest rates helped the apartment market avoid a collapse. While rent growth slowed and returns dipped, the industry fared far better than during the Great Recession.
In fact, remote work trends during the pandemic spurred demand in more affordable, less regulated markets, leading to a surge in multifamily construction in the years that followed.
The federal government and the Federal Reserve typically respond to recessions with aggressive stimulus, but rising inflation complicates that playbook. During the Great Recession, inflation was low, even dipping into deflation, allowing policymakers to inject nearly $1 trillion in stimulus and slash interest rates to zero without stoking price increases.
The COVID-19 recession was a different story. Massive fiscal stimulus and easy monetary policy collided with global supply chain disruptions, creating the highest inflation rates since the early 1980s. Inflation became a lasting consequence of the pandemic response, raising questions about how policymakers would react if another recession hits soon.
“High inflation limits the government’s ability to respond forcefully without worsening the problem,” Bruen explained. “That’s the challenge we’re facing now.”
The most troubling risk facing the economy, Bruen noted, is the growing potential for stagflation—an economic slowdown coupled with persistently high inflation. Consumer inflation expectations are climbing, with the University of Michigan’s survey showing year-ahead expectations rising from 2.6% in November to 4.3% in February. The Conference Board’s survey found even higher inflation expectations, surging from 5.2% to 6% in a single month.
Headline inflation remains stubbornly above the Fed’s 2% target, coming in at 2.8% in February.
“In the worst-case scenario, the Fed faces conflicting goals — controlling inflation or protecting jobs — just like during the 1970s,” Bruen warned. “Back then, the Fed chose to raise interest rates sharply, triggering a recession but breaking the back of inflation.”
It remains unclear whether the current Trump administration—which has prioritized spending cuts—would reverse course in the event of a recession, or if Federal Reserve Chair Jerome Powell would choose to risk a deeper downturn to rein in prices.
For apartment owners, investors, and developers, the current moment is fraught with risk. A mild recession could cool rent growth and delay new projects, while a severe downturn could repeat the Great Recession’s devastating impact on vacancy rates, rents, and returns.
Complicating matters, high inflation could prevent policymakers from offering the level of support the industry saw during COVID-19.
“Stagflation is the worst of both worlds for the apartment sector — weak demand and soaring costs,” Bruen said. “It’s a scenario we haven’t seen since the 1970s, but it’s one we need to prepare for.”
David, what does this report tell us about the housing crisis?
Good question. One thing I want to say is I like printing stuff based on the NMFH reports because it’s basically the apartment industry and thus, what I would consider another side of a multi-prong story.
With that caveat, I would note that housing demand is inelastic – as people will need places to live. However, if they are right and this will stall construction (already a problem), this will worsen the supply-demand gap and thus deepen the affordability crisis.
Not sure if that was where you going with your question, but it’s my immediate take on the report – again with the caveat I mentioned at the beginning.
David says: “With that caveat, I would note that housing demand is inelastic – as people will need places to live.”
The first part of that phrase is incorrect, and is not supported by the second phrase.
Housing demand is absolutely “elastic”, since people can choose where to live, with whom (e.g., parents, partners, roommates, etc.). In addition, people and communities gain and lose jobs.
These type of factors impact “demand”.
On a related note, I was just watching a YouTube video, entitled “Why Housing Keeps Getting More Expensive”. (It’s from an anti-capitalist organization, but it’s actually pretty well-done.) For example, the video notes that rental algorithms have resulted in higher income – EVEN THOUGH it results in significantly higher vacancy rates. (The opposite of what one would expect.)
He also claims that high prices are NOT due to supply of housing. (Keep in mind that he’s apparently not a “no-growth” type of commenter.)
https://www.youtube.com/watch?v=woz4KgUbIMc&t=1s
I wasn’t going anywhere in particular. Your answer focused on the supply side but really didn’t address the demand side other than to say “that housing demand is inelastic.” The challenge I see in your statement is that the article is about declining housing demand. If demand is inelastic, how can it be declining?
Good question – complicated answer.
In a broad sense, demand for housing is inelastic in the sense that people need housing, but they cannot afford any housing at any price, in any market condition.
From that perspective, in the long term, people will need a place to live but in the short term demand can decline.
For example, we know when the market in Davis got tight for renters, we saw renters sleeping on couches, tripling up, and living in cars.
So what has actually declined? Not the need for housing, but what you might call effective demand, the number of people who can and will pay for prevailing rent.
In the article, the group cited, expresses the concern that short-term recession and inflation can and will suppress short-term demand, particularly in high-cost markets.
David says: “In a broad sense, demand for housing is inelastic in the sense that people need housing, but they cannot afford any housing at any price, in any market condition.”
That sentence doesn’t seem to make sense.
David says: “So what has actually declined? Not the need for housing, but what you might call effective demand, the number of people who can and will pay for prevailing rent.”
The need for housing and demand for housing in a give location are two different things. This is one of the ways that “elasticity” comes into play.
But I thought I’d go ahead and look up what “effective demand” means:
Factors Influencing Effective Demand:
Consumer Income: Higher incomes generally lead to higher effective demand.
Consumer Confidence: If consumers are optimistic about the future, they are more likely to spend and increase effective demand.
Interest Rates: Lower interest rates can make borrowing cheaper, which can stimulate spending and increase effective demand.
Government Policies: Government policies, such as tax cuts or increased spending, can also influence effective demand.
Importance:
Understanding effective demand is crucial for understanding overall economic conditions, production, and pricing.
Example:
If a person wants a new car but doesn’t have the money to buy it, their desire is not effective demand. However, if they have the money and are willing to spend it, their demand becomes effective.
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In your example (assuming it’s actually significant), what you’d eventually find is students choosing a different university – like Merced. Or, more students living at home with their parents while attending a local college for the first couple of years.
Or, fewer International students choosing a given university.
When prices rise, demand decreases (and vice-versa). That’s part of the supply/demand model itself.
David, I don’t think you understand the definition of inelastic demand, which is when changes in price cause a small change in quantity demanded (smaller than the proportional change in price). What the article clearly describes is how increases in price are producing significant decreases in demand.
What you are describing as inelastic demand is each individual person needing a place to lay their head each night. That is a given, but there are many ways to satisfy that need, only some of which contribute to the demand for housing units. One example here in Davis is the conversion of apartment unit rentals into bed rentals. The demand for an individual unit, which is what the housing industry measures is always equal to the number one. If the tenants choose to double up bedrooms (I shared a bedroom with my two brothers) as almost all husbands and wives do, the demand doesn’t increment up as a result of the sharing. If a group of three students rents a three bedroom unit the demand value is one. If they double up all three bedrooms, the demand isn’t six, it is still one, even though on your social need scale six places to lay heads are accommodated. I had friends growing up who shared one bedroom with three siblings in two double decker bunk beds.
“Price elasticity of demand (PED) is an economic concept that measures how responsive consumers are to price changes for a product or service. It’s calculated by dividing the percentage change in quantity demanded by the percentage change in price. PED is always presented as a positive value, or absolute value.”
MW say: “What you are describing as inelastic demand is each individual person needing a place to lay their head each night . . . . there are many ways to satisfy that need, only some of which contribute to the demand for housing units. One example here in Davis is the conversion of apartment unit rentals into bed rentals.”
Another example here in Davis of a place for each individual person to lay their head along a bike path, drainage ditch, PG&E wall, downtown business doorway — and poop in a bucket or on the ground.