Renters, grappling with the burden of surging rental rates and an escalating cost of living, have been eagerly anticipating a rental slowdown in the market. The year 2023 was anticipated to be the turning point, offering relief after two years of unprecedented growth. The decline started around September 2022, fueled by lower demand, and continued until rents hit their lowest point in February 2023.
However, the tide seems to have shifted as rents started pacing up in the upward trajectory up until August 2023, with a slight dip. August 2023 marked the point of reversal of the growing upward trend yet again and has been on the decline since, continuing for the fifth consecutive month in December. The recent decline has left many weighing the future direction of the rental market in the US. Factors such as new multifamily apartment deliveries, vacancies, and the overall economy is influencing rental prices in the US. While this development is positive news for renters, it poses challenges for investors and landlords.
- National Rental Market Overview: The rental slowdown, spanning five consecutive months, marks a significant shift from the previous upward trend. Amidst soaring home prices and seasonal patterns, the decline in rents is notable, with the median asking rent in the US dropping by 0.8% in December 2023. This downturn, attributed to a “building boom” and typical off-season trends, reflects a bottoming out of YOY rent growth at -1%, suggesting increased affordability.
- Regional Disparities: Regional observations highlight varying impacts, with the Southern and Western regions experiencing notable rent reductions. Cities like Oakland, Huntsville, and Atlanta witnessed steep declines, while high-cost coastal metros like San Francisco and Portland faced a slowdown in rental demand. In contrast, the Northeast and Midwest, having built less compared to the West and South, see more resilient rents, exemplified by cities like Lexington, Norfolk, and Fresno experiencing growth.
- Impact of Mortgage Rates: The ongoing rental slowdown is influenced by a persistent decrease in mortgage rates, offering potential advantages for renters looking to transition into homeownership. The anticipated surplus of unoccupied units in the upcoming year suggests a potential deceleration in rental demand, posing challenges for landlords contending with increased vacancies.
- 2024 Outlook and Market Challenges: The rental market’s future trajectory in 2024 remains uncertain, with the introduction of over 670,000 new units, but construction starts slowing down. Challenges related to interest rates and expenses, including notable increases in labor, maintenance, and insurance costs, add complexity. While experts anticipate relief from some market pressures, the impact on short-term loans issued between 2020-2022, coupled with remaining high loan coupons, may lead to distress for multifamily property owners.
Exploring the Rental Slowdown Amidst Soaring Home Prices And Seasonal Patterns
While prices of homes in the US continue to climb, rents are experiencing a decline after a sustained upward trend for the past consecutive five months. In December, the median asking rent in the US dropped by 0.8%, settling at $1,379, as per recent reports. This shift may be attributed to an increased supply resulting from a considerable “building boom” that aligns with the prevailing demand. The recent decreases also align with the typical seasonal pattern in the rental market, as fewer renters tend to move during the winter and autumn months, with December positioned squarely in the off-season.
Examining the YOY rent growth reveals a bottoming out at -1%, indicating that, on average, apartments across the country are marginally more affordable today than they were one year ago. This trend could be attributed to the significant number of completed multi-family apartments in the US, nearing levels not seen in over three decades.
This YOY decline in apartment rents stands starkly apart from the conditions of FY 2021 and FY 2022 when rent prices were sharply rising, reaching a peak YOY growth of 18% nationally. Despite the current cooldown, the national median rent still holds nearly $250 per month higher than it was just three years ago.
The onset of the off-season arrived a month earlier than typical, marked by a small 0.1% decrease in rent during August. Subsequently, the monthly downturns have shown a gradual decline – a 0.6% decline in September, followed by a further dip of 0.8% in October, and now culminating in a 0.9% reduction in November.
The Ongoing Rental Slowdown and Regional Observations in 2024
The persistent decrease in mortgage rates is a significant factor contributing to the ongoing decline. Dropping mortgage rates can prove advantageous for renters, as individuals who have been on the sidelines of the housing market might now find the opportunity to transition into homeownership. If the downward trend in mortgage rates continues swiftly throughout 2024, the deceleration in rental demand could emerge as a primary catalyst for rent reductions.
This is because a growing number of Americans may opt to leave the rental market, making landlords contend with an increased number of vacant properties. It is anticipated that the surplus of unoccupied units will persist in the upcoming year.
The most notable slowdowns in rent growth were observed in the Southern and Western regions. Rent reductions were witnessed in 60% of the nation’s largest hundred cities on an annual basis. According to the latest reports, the steepest declines occurred in Oakland, dropping by 9.3% YOY, Huntsville by 5.7%, and Atlanta by 5.6%.
Rent decreases were particularly evident in the Sun Belt, with cities like Jacksonville, Austin, Orlando, and Phoenix experiencing over 20% YOY rent growth in 2021, now facing the swiftest declines. The metro areas of San Francisco and Portland are also witnessing some of the nation’s slowest YOY growth, underscoring that high-cost coastal metros are encountering a slowdown in rental demand. These markets were among those that experienced rapid declines in 2020, and while the deceleration is less pronounced today, it is still noticeable.
Rent Trends In The Northeast And Midwest Amidst Growing Demand
On the flip side, rents are changing direction in quite a few cities across the Northeast and Midwest. The reason rents are holding up better in these areas is that they haven’t built as much as the West and South. This means some landlords in the Northeast and Midwest aren’t as eager to lower prices since they’re not dealing with as many vacant properties.
In Lexington, rent is growing the fastest, with a yearly rate of 6.4%. Following closely are Norfolk at 6.3% and Fresno at 5.5%. Interestingly, big cities like Boston, Chicago, and New York City are also experiencing an increase in rents.
What Could You Expect With The Rental Market Going Forward In 2024?
While the market is poised to introduce over 670,000 new units in 2024, construction starts are slowing down due to challenges related to interest rates and expenses. The anticipation is to start to remain weak, with the impact possibly not being evident on deliveries until 2026.
Expenses experienced a notable increase in 2022 and 2023, primarily attributed to labor, maintenance, and insurance costs. Some of these expenses may decrease as inflation subsides, but insurance premiums could persistently rise due to an uptick in severe weather events.
Interest rates saw a decline of 100 BP in December, and the market currently foresees no further rate hikes, with some expecting cuts through 2024. While any additional cuts would lessen the refinancing gap for all the multifamily owners, loan coupons remain significantly higher than they were in Q1 of 2022 when the Federal Reserve initiated all the rate increases. Many experts believe that this downward trend may relieve some pressures on the market, although not all. Short-term loans on the value-added properties issued between 2020-2022, with low rates, are likely to encounter the most distress.
The ongoing rental slowdown, now in its fifth consecutive month, marks a notable shift in the housing market. The trajectory, initially reversing in February 2023, continues to exhibit a decline after August 2023, impacting both renters and property investors, both in positive and negative ways. The decrease in rental rates, particularly in the Southern and Western regions, is influenced by factors such as a surplus of unoccupied units, dropping mortgage rates, and regional variations in building activities.
Noteworthy is the distinction between the Sun Belt cities that experienced rapid rent growth in 2021, now facing significant declines because of the record high multi-family apartments, and the Northeast and Midwest, where rents are holding up due to limited construction.
The market’s future trajectory in 2024 remains uncertain, with over 670,000 new units expected but at the same time, construction is expected to slow down. Experts anticipate relief from some market pressures, but challenges persist, particularly for short-term loans on value-added properties. Stakeholders must remain vigilant to the impact of interest rates, expenses, and regional dynamics, as the market adapts to the changing economic factors in the coming years.