The rate of increase in apartment rent is rapidly dropping, favoring tenants for the first time in years.
New-lease asking rentals increased by a little under 2% over the 12 months ended in May, according to the average of six national rental-price measurements from rental-listing and property data businesses.
According to analytics firm CoStar Group and rental software provider RealPage, it is a decrease from the double-digit growth of a year ago and reflects the biggest decline over any year in recent history.
Millions of renters who have had to deal with rent increases that increased 25% nationally in less than two years would be relieved by a yearly drop. Rent decreases would also aid in reducing inflation since housing costs make up the largest portion of the consumer price index.
For the numerous investors who took out substantial loans to buy buildings where they believed they would be able to maintain rising rents, a year-long decline in rent could pose a challenge. In addition to declining home values and mortgage rates that have virtually doubled since early last year, they must deal with a softening market.
One of the rent indicators, provided by real estate agency Redfin, indicates that asking rents have already started to reduce, with a 0.6% decrease in May compared to the same month last year. Apartments and single-family rental homes are also represented in the statistics, according to Redfin.
Some data sources indicate that the only other instance of a decrease in asking rent over a 12-month period after the financial crisis of 2008 occurred in 2020, when the rental market briefly declined due to the Covid-19 epidemic, breaking a ten-year trend of rent increases.
After an unheard-of run, the rental market in the United States is slowing down. Monthly rents have increased by at least 35% in some regions, including Miami and Riverside, California, over the last three years. But in the second half of 2022, as many renters were pushed to their financial breaking points by increased rents, the high prices started to erode demand from renters. Some people are returning to live with their parents, getting roommates, or migrating to less expensive cities.
Additionally, the historically high number of new units currently under development is increasing landlord competitiveness. According to housing economists, this will contribute in lowering rents in some regions of the nation, such as the South and Southwest, which are experiencing the highest levels of building.
Rent increases would come after recent drops in home market prices. The biggest year-over-year price reduction in more than 11 years occurred in April, when the median existing house price nationwide decreased 1.7% from a year earlier.
One factor in why rent continues to rise faster than average, as measured by official inflation indicators, is the relatively large renewal hikes. The consumer price index’s shelter subindex increased by 0.6% in May, bringing the yearly increase to 8%.
However, new-lease rents—which track changes in the cost of flats that are open to new tenants—are viewed as more of a leading indicator. According to Jay Parsons, chief economist at RealPage, landlords also anticipate to continue lowering the amount they charge their current tenants as new-lease rent prices decrease.
If landlords don’t reduce renewal rates, they run the risk of having too many tenants vacate, which would raise vacancies, which have already risen by 2.6 percentage points during the course of 2022.
This year, tenants are paying lower increases to extend their current leases. According to RealPage, the typical renter in a professionally managed apartment complex spent 6.5% extra to renew their lease in May. That number is down from a peak rate of 11% and has been declining for 10 months.
After years in which owners had leverage, the dynamic is starting to transfer bargaining power to tenants in some hot rental markets. When they learned there would be a 12% rent rise at the end of February, David Frey and his wife Lexi began considering leaving their apartment in Jersey City, New Jersey. Based on what they were already spending, they thought that was too much. The couple signed a lease for a new, larger, and more affordable apartment when the property management refused to compromise, according to Frey.
According to Frey, the business listed their prior property for lease online at a lower rental rate than what they had been offered.
The reality for some investors who purchased apartment buildings with the intention of raising rents is rapidly shifting, particularly in the Southwest. New lease rents are reportedly already deep into the red this year in many of the areas where investors rushed, including Phoenix and Las Vegas.
Values of multifamily buildings are declining together. According to data provider MSCI Real Assets, the cost to purchase apartment buildings in Phoenix decreased 12% in the first quarter of 2023.
According to Apartment List, 48 of the 100 largest U.S. cities are experiencing negative yearly rent increases for new leases.