Tenants facing soaring rental rates and a higher cost of living have been anxiously waiting for a slowdown in the rental market. Many hoped 2023 would be the year that rents dropped after two years of unprecedented growth. In September 2022, prices began a decline — led by decreased demand — which lasted until rents bottomed out in February this year.
Price levels have risen steadily since, growing by nearly 4%.
But the tide could be turning. According to a recent report published by Rent., rents fell in September for the first time in six months. The median rental rate was down 2% from August, the equivalent of more than $40 in rental savings. While the national median rent is still up 0.4% year over year, the recent drop in rents has many wondering where the market is heading. Vacancies, new multifamily deliveries and the economy will impact rents in the near future.
It’s good news for renters, of course, but what’s changed? And more importantly, is it here to stay? Here’s what experts — and the data — have to say.
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What’s Changed?
Supply and demand drive everything in our economy, rental prices included. When supply is high and demand is low, prices fall. Over the last two years, the market saw unparalleled demand at a time when supply was low, which led rental rates to increase by double digits year over year. However, it seems supply and demand are shifting, thanks to a steady increase in new multifamily housing deliveries.
In the wake of the pandemic, new construction for multifamily housing went full steam ahead. At its peak in August 2022, there were nearly 60,000 new multifamily housing permits issued, according to the U.S. News Housing Market Index. That’s the largest number of new permits issued since at least 1990. Now, that inventory is finally hitting the market, creating more supply and more options for tenants.
“In general, prices are coming down due to below-normal demand coupled with an influx of supply. That imbalance of supply and demand means landlords are having to compete for tenants more than they did at this time last year,” says Jon Leckie, a researcher for Rent.
The national rental vacancy rate has climbed steadily for the past 23 months, according to data from Apartment List. As of September 2023, the vacancy rate was 6.4%, which is near pre-pandemic levels.
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Where Rents Are Rising
While the national median rental rate dropped slightly in September, not every market is falling. Some markets are still seeing rents rise, now that many companies are returning to the office. Additionally, other markets are seeing an increase in rents due to the area’s general affordability. According to Rent.’s report, the national median rental rate was $2,011 in September 2023.
Rent fluctuations and vacancy trends are highly localized, and they offer a snapshot of shifting conditions in local markets across the U.S.
These rental markets are seeing the highest increase in rental rates on a year-over-year basis. The more affordable regions of the country, particularly in the Midwest, saw rents soar in 2022 and early 2023.
“Midwestern markets have experienced some of the lowest rent growth over the past three years, making it an increasingly attractive region as renters get priced out of other parts of the country,” says Rob Warnock, senior research associate at Apartment List. But it appears the rate of growth is leveling out. Month-over-month data for rents in many Midwestern markets are starting to slow. Now, there is higher demand returning to larger markets with big job economies, like New York City and the surrounding areas.
“Since the start of the pandemic, rents have grown faster in suburban markets than in urban ones,” Warnock says. “As housing demand moved outward from city centers, the suburban rental market outpaced its urban counterparts by as much as 7%.”
That trend is starting to reverse now that people are returning to offices.
Where Rents Are Falling
The markets where rents are falling faster are primarily across the Sunbelt region of the country. These markets, along with a few other cities, were previously the fastest-growing rental markets in the U.S. In these areas, it appears rental prices have reached a tipping point, both in part for affordability but also for new construction deliveries.
“Massive rent increases since 2020 have made these regions much less affordable for renters plus rapid housing construction is boosting vacancy rates. Therefore, landlords have less of the upper hand and are, on average, lowering their prices in order to attract new renters,” says Warnock. Here are the markets where rates are falling the fastest on an annual basis.
What’s Next?
With just one month of decreasing rental rates, there really isn’t enough data to accurately predict where the market could go by the end of the year. October will be a better indicator as to whether or not this downward momentum is a trend or a seasonal phase.
Prior to the pandemic, the rental market went through seasonal fluctuations of demand. But for the past two years, the rental market didn’t reflect its usual seasonality. “September’s monthly decline is one data point in favor of a return to seasonal trends the market got away from during the pandemic,” Leckie says. “If that holds, expect prices to decline as we get deeper into the fall and bottom out over the winter.”
Warnock echoes that prediction for the next few months, in what is historically the slow season for the rental market.
“Rents should continue to fall for the remainder of the calendar so long as rental movements hold true to seasonal patterns,” Warnock says. “Usually, January or February are the first months when the rental market picks up and prices start rising again.”
Construction for new multifamily properties has dropped considerably from its peak in 2022. However, there still is a boom in new properties coming to market for the remainder of the year. This could put more pricing pressure on oversupplied markets with higher vacancy rates in the short term, especially for luxury apartments, which make up the majority of recent multifamily construction.
The wild card is the overall state of the economy. A recession could cause rental rates to fall further and possibly at a faster rate. However, a recession is not necessarily a guarantee rents will cool. It depends on the supply and demand in the local areas, which are more accurately driven by cost, demand and supply.
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Is The Rental Market Finally Cooling? originally appeared on usnews.com
Update 11/06/23: This story was published at an earlier date and has been updated with new information.
