If you rent your apartment or house, you probably already know that rent has been rising — in some places at staggering rates year-over-year. The cause of rising rent, in many cases, is the high demand for rental housing with comparative supply.
The average rent in the U.S. was $1,717 in July, according to the National Multifamily Report from real estate information company Yardi Matrix. That’s a 12.6% increase compared to July 2021.
On a national scale, the occupancy rate for rental housing in July was 96%, according to the Yardi Matrix report. The number is down slightly compared to 2021, when rates were as high as 96.9%, but up from before the COVID-19 pandemic. At the close of 2019, Yardi Matrix reported the occupancy rate was 94.9%.
Vacancies, new rental housing coming on the market and the state of the U.S. economy all play vital roles in where rent will go in the near future. Here’s a breakdown of the causes of rising rent in 2022 and what to expect going forward.
— How recession impacts renters.
— Causes of high rental demand.
— Finding a deal on a rental depends on where you live.
— Supply struggles are likely to continue.
— You’ll pay less if you renew.
[Read: Things Renters Should Do Before Signing a Lease]
How Recession Impacts Renters
Any period of economic downturn can have industry leaders and financial experts looking at key areas of the economy to see what will happen next. When reacting to each other, the stock market, unemployment and home sales can indicate a deeper or more shallow recession, but rents have a more independent ebb and flow.
“If you actually look at the rental index and you look at past recessions, the answer is that rents really don’t go down in recessions. And not only that, but vacancies can go either up or down in recessions.” says Anthony Yezer, professor of economics at George Washington University.
Data from the U.S. Census Bureau reveals rental vacancies have trended downward since the third quarter of 2009, when it reached a historical peak of 11.1%. Rental vacancies in the second quarter of 2022 were 5.6%, based on Census Bureau data. The last time quarterly vacancy rates were this low was 1982.
While affordability is a concern for many renters as they see rents jump more than 12% compared to the last time they signed a lease, a recession isn’t necessarily going to help the situation. Especially if people are already renters because they cannot afford to purchase a home, the high volume of renters will lead landlords to continue increasing rents.
Causes of High Rental Demand
Rents rise fast when there’s enough demand to warrant higher rates. While the exact causes for rising demand vary depending on the individual city, state or even neighborhood, here are a few factors contributing to high rents now, and potentially in the future:
— Migration to metro areas with smaller populations. People are choosing new places to live that don’t necessarily depend on where their employer is based. As a result, places like South Dakota are seeing an influx of new residents who previously wouldn’t have considered the state for work.
— Immigration to the U.S. increases the total population. Immigration largely stalled during 2020 and 2021 as a result of the pandemic, and has since restarted. “There may be more people who want to rent so that may increase rental demand, but on the other hand there may be more people who are doubling up,” Yezer says. If people choose to live with roommates or family now, there could be a delayed increase in demand as those individuals choose to live on their own in a year or more.
— High home prices. High home prices, rising interest rates and concerns about a recession has many first-time homebuyers deciding to wait to buy a house and rent instead.
— Low supply of new rental housing. Lack of significant addition to rental market inventory means demand is outgrowing the available rentals in the U.S. Expect lack of construction, or its slow pace, to continue to exacerbate housing shortages. “There’s a lot of potential to push up rents, on the supply side, not much of anything going on,” Yezer says.
[READ: Can You Negotiate Rent?]
Finding a Deal on a Rental Depends on Where You Live
While national averages offer a bird’s eye view of the situation, change in rents is best examined locally by market or region. The pandemic spurred many people to explore different parts of the country.
Initially, many people in major cities sought less density, then long-term remote work options sparked interest in secondary and tertiary housing markets. Renters returned to major cities, but smaller metro areas in states like Vermont, South Carolina and Idaho continue to see rapid population growth.
“People are less tethered to their job than they were, physically, prior to the pandemic,” says L.D. Salmanson, CEO of Cherre, a real estate data management and analytics platform based in New York City.
As a result, markets that weren’t previously known for their density have seen particularly high rent growth due to booming demand. Orlando, Florida, for example, saw its rent increase 20.2% year-over-year in July, according to Yardi Matrix. San Francisco, on the other hand, was closer to the bottom of the report’s year-over-year rent growth at just 9%. Other major markets in the U.S. see rent growth year-over-year closer to the average, with Seattle at 14.9%, Atlanta at 13.2% and Los Angeles at 11.1%. The Minneapolis-St. Paul market was at the bottom, with just 4.2% year-over-year rent growth.
“You are seeing some markets where rents are starting to level out a little bit and begin to even decline a little bit. Again, there are still many markets where rents are growing at a very high rate and fundamentally in my mind it’s down to we don’t have enough supply,” says Jeff Adler, vice president of Yardi Matrix.
For the markets that previously didn’t expect such sudden sudden population growth and don’t have enough housing construction in the pipeline to meet demand, relief in rent could be a long way off. “Rents are going to stay high, I think, in a lot of those secondary and tertiary markets,” Salmanson says.
Supply Struggles Are Likely to Continue
Fixing the housing shortage isn’t so simple as deciding to build new apartment buildings or developing a new neighborhood. Salmanson points to construction materials shortages, delays in materials shipments and local permitting and zoning woes as ongoing problems. “These are all headwinds to build new supply,” he says.
Building permit approval and zoning laws have been a long-term problem for many builders, and Adler points out that because such laws are at the local level — not even at the state level — it is much harder to make building a smoother process.
“This housing shortage, and we do have a housing shortage, is completely preventable,” Adler says. “It was manmade, it can be unmade. They set public policy choices that have resulted in a shortage of housing … and there is not yet, truly, a public policy consensus at the local level, which is really where the rubber meets the road, to enable bigger levels of housing supply.”
Added to the many obstacles in a builder’s way are high inflation and rising interest rates that could keep homebuyers or investors from purchase new homes. The National Association of Home Builders and Wells Fargo Housing Market Index shows builder confidence dropped 12 points in July, among builders of single-family homes. It’s the biggest single-month drop in confidence since April 2020, and the lowest measure of confidence since May 2020.
You’ll Pay Less if You Renew
As a renter, you don’t have much control over being able to jumpstart housing construction nor do you have the ability to halt inflation, but you can strategize to get a lower rent when you sign your next lease.
Renewing your current lease is likely to give you the smallest increase in rent for now. “Renewal rents are much lower than the rents being offered to new renters, and the rate of increase is lower. It’s still high (though) … not nearly as high as new renters,” Adler says.
You still won’t be immune to rising rent, however. Regardless of the economic situation, expect your rent to keep climbing over time.
“When (your) leases are renewed after a year or two, don’t expect that you’re going to do any better, not with this low vacancy rate,” Yezer says.
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What You Should Know About Rising Average Apartment Rents originally appeared on usnews.com
