When Will Apartment Rent Prices Start to Come Down?
In the last two years, an increasing number of tenants have had problems finding affordable multi-family space for lease.
While this has traditionally been an online challenge for renters headed for popular, crowded destinations, such as New York City and California’s West Coast, even small-town tenants found their options beginning to dwindle through late 2020.
Contributing Factors to Rising Rental Rates
One contributing factor to rising rates is housing supply and demand. This hasn’t just affected the multifamily rental market; the residential housing market has seen prices skyrocket, especially when buyers greatly outnumbered sellers.
In turn, shortages in desirable rental properties have enabled landlords to set prices higher.
Another contributing factor: inflation. Not only are renters feeling the squeeze on their cash flow, but so are their potential landlords, especially the smaller operators whose tenant-related costs are rising.
While the Federal Reserve continues to raise interest rates in order to slow inflation, whether this will bring affordability back to the multifamily rental markets — and when — remains unknown.
In the meantime, many renters are being affected by rising mortgage rates, even though they don’t have mortgages. Here’s why.
Why Rent Sometimes (But Not Always) Follow Home Prices
There are several factors affecting the relationship between rental prices and mortgage costs, and not all are directly related to inflation. One of the most prevalent factors is quite straightforward.
Since the cost of buying a home has skyrocketed since 2020, this has made homeownership unaffordable for a growing number of potential homebuyers. As more of them are “priced out of the market,” they continue to rent while waiting for prices to cool. This has increased demand for rental properties in some areas, driving up rent prices as well.
However, rents began rising before the arrival of the pandemic and the subsequent rush to buy a first home or move to another area.
This is because there are several types of landlords, and each has its individual challenges as well as shared ones.
For example, a landlord may also be a homeowner who purchased a second property as an investment. If the costs of purchasing and maintaining the investment go up, the landlord will probably try to recoup at least some of these costs by raising the property’s rent price.
Investors who have entered the rental market through a real estate investment trust, or REIT, may also be faced with rising costs, depending on how their REIT is structured.
Landlords who specialize in high-end properties may still find plenty of potential tenants. However, those who have invested in more affordable properties may find themselves with more vacant units, even with minimal rent adjustments.
As one real estate economist stated: “If they can’t afford it, you can’t lease it.”
Another unique factor driving rental prices has less to do with inflation, and more to do with recovery…or perhaps, greed.
The Aftermath of Eviction Moratoriums
After the coronavirus pandemic reached a global status in the spring of 2020, tenant evictions were largely stopped to help prevent the spread of COVID-19.
The CARES Act of 2020, an economic stimulus bill, also provided funds in response to the economic fallout caused by the pandemic.
Landlords were suddenly powerless to evict non-paying tenants while a federal or local eviction moratorium was in place.
However, the moratoriums did not cancel rent. Tenants still owed rent for the unpaid months.
As eviction moratoriums ended, many landlords raised their monthly rental rates when current leases expired to help partially recoup lost income. Generally, these rates are still in effect.
If you’re thinking that there must be some good news on the horizon, there is for renters…although, the news may not be as good for homeowners.
This is because the residential housing market has finally begun to cool down in many areas.
In addition, shortages of multifamily properties are decreasing as more new apartment buildings are completed and becoming available.
Are rent hikes on the way out?
After watching rental prices rise every month for a total of 20 months, a number of potential tenants may finally get a break, depending on where they live.
Data shows that none of the nation’s top 40 largest rental markets saw their year-over-year asking rents expand as recently as August 2022.
For example, residents of popular Florida cities such as West Palm Beach and Boca Raton have seen rents come down.
However, renters in San Diego, California didn’t get the same break as prices continued to increase.
Analytics for multifamily homes found that market conditions have begun a complete reversal. Instead of demand being higher than available units, renters affected by inflation are largely avoiding newly-delivered multifamily real estate.
Real estate data and analytics specialists CoreLogic took a deeper, one-year dive into rental price movements from August 2021 to August 2022.
Changes in Rental Property Prices Since August 2021
Changes in rental property prices during these 12 months were as follows:
Lower-priced (75% or less than the regional median): 12.9%, up from 7.4% in August 2021;
Lower-middle priced (75% to 100% of the regional median): 12.8%, up from 8.3% in August 2021;
Higher-middle priced (100% to 125% of the regional median): 12.3%, up from 9.4% in August 2021; and
Higher-priced (125% or more than the regional median): 10.1%, down from 10.7% in August 2021.
While the national rental market shows some signs of a cooling-off period, renters may still find their preferred areas out of their reach in the immediate future.
Affordable rentals may be easier to locate if two or more friends or relatives agree to share a larger unit or negotiate with the owner of a single-family property.
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