Rental Market Update: Declining Rent Growth Offers Relief for Tenants

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Episode Transcript:

Today, we're diving into the latest developments in the rental market, where we're witnessing a significant shift in favor of tenants after years of soaring rent growth.

Recent data reveals that apartment rent growth is declining rapidly, signaling a turning point in the rental market. Over the past 12 months, new-lease asking rents have risen by just under 2%, a stark contrast to the double-digit increases experienced in the previous year. This deceleration represents the largest decline in recent history, according to industry experts at CoStar Group and RealPage.

This decline in rent growth comes as a relief for millions of renters who have faced a staggering 25% increase in rents nationwide over the past two years. Additionally, as housing costs make up a significant portion of the consumer-price index, a decrease in rents could help alleviate inflationary pressures.

However, this decline poses potential challenges for investors who took out substantial loans to acquire properties with the expectation of continuously raising rents. They now face a softer market, falling property values, and interest rates that have doubled since last year.

The rental market in Las Vegas and several other U.S. cities has already experienced a decline in new-lease rents compared to a year ago. Redfin's data, in particular, indicates a negative growth trend, with a 0.6% decline in asking rents in May. This data encompasses both apartments and single-family rental homes.

The decline in rent over a 12-month period is a rarity, having occurred only once since the 2008 financial crisis, during the temporary rental market dip in 2020 caused by the Covid-19 outbreak.

While certain markets, such as Miami and Riverside, California, have witnessed monthly rent increases of 35% or more over the past three years, demand has started to weaken, particularly in the second half of 2022. Many renters have reached their financial limits due to higher rents, leading to decisions such as moving back in with parents, finding roommates, or relocating to more affordable cities.

Additionally, the construction boom of new apartments has intensified competition among landlords, ultimately slowing down rent growth in regions with high construction activity, like the South and Southwest.

Amidst these changes, the rental market is experiencing a correction, according to Rob Warnock, a researcher at Apartment List. Rents are rising under 1 percentage point for the year, signaling a shift in dynamics.

Furthermore, the decline in rent growth aligns with recent price drops in the housing market. The national median existing-home price fell 1.7% in April, marking the most significant year-over-year decline in over 11 years.

Landlords are expected to lower renewal rates to retain tenants and prevent an increase in vacancies, which rose by 2.6 percentage points throughout 2022. This shift in power to tenants has led to negotiation and strategic decision-making, as exemplified by the story of David and Lexi Frey, who chose to move to a bigger and more affordable apartment after receiving a hefty rent increase.

Some investors who anticipated raising rents now face a changing reality, particularly in the Southwest. Cities like Phoenix and Las Vegas have already seen new lease rents decline this year, resulting in falling multifamily building values.

While this decline in rent growth provides a break from the affordability crunch, it is not an affordability windfall for tenants, as Warnock highlights.

This is Tyler Cauble, Signing off