Apartment Rents Are Poised for a Big Downturn

September 7, 2023

The pace at which apartment rents have been climbing has cooled significantly, and they may actually go negative as a wave of new units hit the market.

The national average rent in August was just 0.28% higher than a year prior, according to real estate tech firm RealPage. That is a marked slowdown from this time last year when rents posted an annual gain of 11%. Aside from a brief drop during the early days of the pandemic, we have not seen negative annual rent growth in well over a decade, and even then, the downturn was due to weak demand amid the Great Recession.

Today, demand remains high. Apartment occupancy rates nationwide are at 94%, which is in line with historic norms. In fact, surging mortgage rates, climbing home prices, and a scarcity of inventory have kept more potential buyers in the rental market. The issue is not one of demand, but rather the massive supply of apartments.

Over the past three years, more than one million new units have been built, an all-time record. This year alone, 460,000 units are set to be completed. That is the highest in more than 50 years. This means that renters have more options and landlords have less leverage to raise rents.

Already, some of the fastest-growing cities have seen sizable rent decreases. Rent in Austin and Phoenix is down 4.9%, 4.7% in Las Vegas and 3.7% in Atlanta.

This is good news for inflation, as shelter costs account for more than one-third of the total consumer price index (CPI) inflation gauge.

How long this trend continues remains to be seen. The new supply of units should keep rents down through next year and potentially 2025. However, new construction has dropped sharply this year amid more expensive financing, meaning supply may be constrained again, driving rent back up.

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