Supply and Demand Dynamics in the Real Estate Industry

Real estate differs from other investments in a few big ways—after all, it’s a tangible asset that can’t be physically moved. But just like other assets, real estate is constantly affected by supply and demand.

According to the Apartment.com Q1 rent report, prices are still inching up, but there’s a lack of clarity about what key issues like dropping construction rates and leveling vacancy will do to the market. That means it’s more important than ever to dial in fair market value, connect with new generations of renters, and optimize your operations to balance investments and the bottom line.

If you’re a property manager, you’ll want to know everything about the housing market’s relationship to supply and demand. Once you understand these forces, you can set appropriate rental pricing and keep up with competing properties in your area.

Supply and Demand: Understanding the Basics

The law of supply and demand is a basic principle of economics. As its name suggests, this law revolves around two fundamental forces:

Demand

When product prices are low, demand will increase. Conversely, market demand will decline when prices rise. 

Today, rent prices are stabilizing at 1% growth year-over-year, but demand is still extremely high. Why? Partially, fewer units are on the market because people are choosing to stay in apartments rather than purchasing homes. It’s complicated!

Supply

Meanwhile, high prices for multifamily properties will encourage builders to break ground. When supply is low, competition for housing will increase, driving prices up.

Supply and demand work against each other until an asset reaches its equilibrium price. We’re seeing that happen right now, with new construction dropping by 45% as vacancy rates are stabilizing at 8.1%.

How These Forces Affect Real Estate

As you might expect, supply and demand play crucial roles in real estate. Examining housing sales is one of the easiest ways to see how this principle affects the industry.

If housing supplies are low in a given area, the amount of money people will pay for a home will probably increase. That, in turn, could lead to bidding wars between multiple people who all want the same property. However, house prices typically decline if an oversupply of properties or a weak economy reduces local demand for housing.

Of course, the law of supply and demand doesn’t just impact real estate in the form of housing purchases. Property managers can also see this dynamic at work in multifamily buildings and other rental properties, but usually without a bidding war. The key is to adjust your rates to align with people’s perception of value. 

That’s what we’re seeing today: since the delivery of multifamily units in 2024 outpaced demand, multifamily construction is expected to slow this year. At the same time, the renter's interest in these units is increasing. That could result in a situation where multifamily supply and demand become aligned for the first time in a while.

So, how do you set your prices? It’s a balancing act, and you’ll need to leverage all the data your property management software can deliver. 

What Factors Define Real Estate Supply and Demand?

As you’re setting your prices, consider the following:

Real Estate’s Illiquidity

Unlike liquid assets like stocks and bonds, it takes time and money for real estate investors to buy and sell properties. Between that and the time required to build or renovate homes, measuring supply and demand requires longer-term market analysis.

Shifts in Housing Inventory

The supply of housing doesn’t stay the same over time. Real estate development and construction can add to the housing available, and inventory also increases when people move. On the other hand, natural disasters and demolitions of existing properties can reduce housing inventory.

Interest Rates

Along with the supply of housing, real estate demand can be affected by interest rates. For instance, 30-year mortgage rates were sub-3% in 2021; in 2025, they’re close to 7%. More people are choosing to rent rather than buy, so demand for apartments is high even though construction rates are dropping. 

The Impact of Supply and Demand on Market Crashes

The 2008 financial crisis illustrates how complex supply-and-demand factors influence the rental market. Before it began, consumers had access to relatively low borrowing rates. In addition to providing reduced mortgage rates, banks were motivated to lower their lending standards. That gave people who previously couldn’t afford homes the opportunity to pursue homeownership.

Between these “sub-prime borrowers” and the entry of speculative buyers into the market, housing demand rose while supply dwindled. As a result, housing prices spiked, and supply struggled to keep up.

However, since demand for housing declines when prices are high, people started exiting the market. That demand reduction triggered a dramatic drop in prices. The U.S. Department of Commerce stated that sales of new homes fell to 774,000 in 2007—a plunge of 26.4%.

Making the Most of Supply and Demand

While property managers can’t directly control the forces of supply and demand, they can take steps to make their properties more appealing in any economic situation. 

To encourage potential tenants to choose your buildings, you can:

• Accurately assess market value. Rent for other properties in your area will vary based on supply and demand, so you’ll need to consider these factors when setting rates. Overly high rates will turn off would-be tenants, but low rates won’t give you enough money to keep your properties in good shape.
• Take presentation seriously. First impressions are everything in the real estate world. You can showcase your homes and multifamily units in the best possible light by taking appealing photos of your properties for online listings.
• Focus on sustainability. 82% of renters highly value sustainable properties, paying 10-12% more for these benefits. When you install eco-friendly fixtures and energy-saving smart technologies, you’ll add value that future-proofs your properties.
• Offer appealing amenities. Now, renters are looking for more than the basics from their apartment buildings. Suppose you can offer renters appealing in-unit amenities (such as high-speed internet, ample storage space, and in-unit laundry). In that case, you’ll have another chance to stand out from the competition. Also, promote community amenities like swimming pools, fitness centers, and community gardens.
• Help residents stay connected. A resident portal can keep your tenants informed of community events if you're in charge of a multifamily building. Residents can also use this software to pay rent and submit work orders.

Stay Competitive with Property Management Software

Many complex factors affect how you set your prices and make investments. Property management firms need software that allows them to leverage all the data to target fair market value accurately. The top systems deliver real-time data on payments and maintenance, improve lead management with connections to major rental sites, and provide useful tools like resident portals that streamline every aspect of your business. 

If you don’t already have property management software (or if your current program lacks one or more of these features), you’ll need a program to help you keep up with the competition. Getting started is easy—simply schedule a demo of ExactEstate and get ahead of the curve.