Apartment Rents Coming Down

The Great Rent Hike of apartments is over. Turns out it wasn’t even a two-year thing. Property owners, tenants and developers should understand what happened, both the upturn and downturn, to better understand why rents will drop in the coming year.

ApartmentList just released its latest rent information showing continued deceleration. The report “Year-over-year rent growth stands at 2.6%, down significantly from a peak of 18% in late-2021.” Month-to-month numbers indicated an increase, but that’s typical for the month of March. The usual low month is January or February.

Apartment rents reflect supply and demand. The story here is a boom in demand followed by a hollowing out of much of that demand, with more weakness to come.

Although some people are definitely going to be renters and others will definitely be owners, there’s a group in the middle who could go either way. A large portion of them would like to be owners; they are getting money saved for a down payment, repairing their credit scores or waiting for more certainty about where to live. There are also people, typically older, thinking about downsizing from a single family home to an apartment, condominium or adult living facility. Rents will be pushed up or down when that middle group moves into or out of apartments.

Another demand fluctuation that has only recently been much recognized is roommates. Some adult children live with their parents (11% according to the Census Bureau). Other people share housing with roommates they are not partnered with (16%). And some couples who are married contemplate divorce. These decisions to share quarters affects the demand for apartments.

When the pandemic hit, living in a small apartment downtown lost its glamour. Larger homes felt more comfortable for remote work, and commuting time was less an issue. And then the Federal Reserve pushed interest rates down and mortgages hit record lows. People who were already nearing the decision to buy a house did the math and found that they did not have to wait any longer. Some others lost their jobs and had to leave their apartments, either moving back with family or getting roommates. The national average rent in July 2020 was two percent lower than the previous July.

This all changed in 2021. Rents began to soar, ending the year 18 percent higher, with more increases in the first half of 2022. The first big factor was the stimulus checks that went out to most people. Social welfare programs also became generous to alleviate hardship and the risk of recession. Employment then bounced back, and companies found they had to boost wages to hire and retain workers. Due to all of this stimulus, household bank deposits plus money market funds increased, rising 37 percent over pre-pandemic levels by the end of 2021. With money in people’s pockets, they wanted to rent more apartment units.

The rent increase occurred simultaneously with single family home price appreciation. People were not moving from one type of housing to another; people wanted more of each.

Population growth could explain increased demand for both apartments and single family homes—but not in this era. The increase in the U.S. population growth in 2021 was the lowest in 100 years. Then 2022 bounced back a little but was still quite low. So growing numbers of people do not explain increased demand for both multi-family and single family housing.

Nor do low interest rates explain the phenomenon, as they would induce a shift away from apartments.

The answer is that stimulus payments enabled people to live without roommates. Adult children moved out of their parents’ homes. Single people found their own digs. And some married couples could now afford to split up, living separately.

Then inflation hit. The cost of living rose faster than incomes. After filling their gas tanks, buying groceries and paying for their cell phones, people were so strapped for cash that they went looking for roommates once again.

The outlook continues to be grim for solo living. Although inflation has come down, wage gains have also slowed in the last six months. Most of us economists anticipate recession sometime in the next 12 months. Look for diminishing ability to pay rents by people on the margin of being able to live alone. Like typical economic changes, most people will not change their behavior. But there are always people on the fence: Maybe I should get a roommate, maybe I should spend the money to live alone. For people on the fence, trying to make up their mind, the change in economic conditions will tip the balance toward roommates. That will continue to depress rents as landlords compete for tenants.

All of this information is national in scope. Individual markets will vary. We would generally expect the faster-growing markets to do better, but sometimes the fast-growing markets attract more developers, leading to temporary overbuilding. So looking at local data can pay off for people making major decisions. The ApartmentList data cited above is available for over 1000 geographic areas. Zillow also publishes rental rate data for many areas.

Here are the actionable implications of the apartment situation:

Owners of existing properties must accept the new reality of falling rents. Advertising rents for new leases that are lower than current tenants are paying won’t go over well. But current tenants can be placated with favorable terms on renewal, such as one month’s free rent.

Developers should understand that rents will be soft until the economy not only pulls out of recession but also recovers all of its lost ground. That may well be three years away.

Tenants should recognize their bargaining power. Getting a rent reduction in the middle of a lease term will be difficult, but getting a month or two free rent upon renewal may be feasible. And for new leases, ask for lower rents or other concessions. A little bargaining may be worthwhile, especially for those who have done their homework.