A major shift in the U.S. rental market is underway and it’s impacting the bottom lines of everyone from seniors living on a fixed income to property owners to Gen Z apartment dwellers.
Despite a robust job market with low unemployment rates and strong wage growth, landlords are struggling to attract new tenants.
After experiencing a historic wave of household formation and relocations in 2021, more people chose to mostly stay put in 2022, causing a negative demand for apartments – the first time this has happened since 2009, according to a new report by RealPage, a real-estate analytics company.
Even with the general population enjoying healthy savings, rental units are sitting empty, and property managers are grappling with dwindling occupancy rates.
What’s Causing the Drop?
It’s a curious predicament that has industry experts speculating about the root cause.
Could it be that the changing priorities of millennials are impacting their housing choices? Are the rising home prices deterring people from buying and, in turn, affecting the rental market? Or is it simply a matter of supply and demand, with an oversupply of rental units exceeding the current demand?
Surprisingly, this weak demand isn’t due to a massive wave of move-outs, doubling occupancy, or a big jump in unpaid rent. In fact, 95.7% of market-rate apartment renters paid on time in November 2022.
It’s actually due to falling consumer confidence, according to RealPage’s analysis, citing the University of Michigan’s consumer sentiment index, which shows confidence dropped even lower last year than it did during the Great Financial Crisis.
This decline in confidence has a freezing effect on people, causing them to hold back from making significant purchases such as new homes.
As a result, many Americans chose to stay put in their current homes, with renters opting to live with family and friends due to economic uncertainty and inflation, including high housing costs.
Demand for Apartments Down
Despite robust job growth and sizeable wage gains, a seasonal bounce in demand did not occur after college graduations during the summer of 2022, indicating that many people were still uncertain about the future.
Though apartment demand dropped last year, it appears that pent-up demand for apartments will emerge if consumer confidence rebounds later this year.
A Shift in Favor of Renters
This low demand has resulted in a change of direction in the market that benefits renters.
New-lease apartment rents fell in December for the fourth consecutive month, dropping another 0.4% amidst soft demand.
While rent cuts in the winter months are seasonally common, the cumulative rent drop of about 1.6% since September is deeper than normal.
Notably, rents have been declining in two of the most popular markets, Phoenix and Las Vegas, in the past year.
Phoenix saw effective asking rents drop by 0.5% and Las Vegas saw a drop of 0.2% last year due to high vacancy rates.
With the current market trends, other markets may soon follow suit and enter negative territory in the coming months.
Outlook Ahead Even Better
Further cuts are likely in early 2023, especially in Class A apartments competing with the oncoming wave of newly built lease-ups.
Despite the national apartment vacancy jumping from a record seasonal low of 2.5% one year ago to 5.0% in December 2022, vacancies will likely increase more in 2023 as new supply surges to the highest levels in four decades.
A total of 971,356 apartment units were under construction at the end of 2022, with about 575,500 scheduled to complete in 2023 – this new supply will especially impact the upper-tier Class A market competing for upper-income renters.
This increase in supply could also mean middle- and lower-tier apartments will be somewhat (though not entirely) insulated from supply pressures.
Apartment completions will be well above average in nearly all sizable markets across the country, and especially in urban core submarkets.
Not Necessarily Good News for Property Owners
For retirees, working professionals, or students who rent, this shift may present both challenges and opportunities.
On the one hand, renters may face increased competition for affordable housing as demand shifts towards lower-priced units. On the other hand, the surplus supply of apartments and weakening demand may present opportunities to negotiate better rental terms and prices.
But for landlords, that translates to less income and a reevaluation of fair market value based on location, amenities, and the amount of available rental housing in the area.
With an influx of new rental units hitting the market, particularly in prime areas, landlords are facing increased competition for tenants.
Property managers are having to rethink their marketing strategies and consider creative solutions to attract new renters. From offering move-in specials and discounted rent to increasing the number of conveniences and services offered, landlords are going above and beyond to entice potential tenants.
Trend is Expected to Continue
Rental prices are expected to continue falling over the next couple of years, as the supply of available units increases.
Even if landlords manage to maintain positive rent growth, they are likely to be forced to offer incentives like free rent or discounted parking to entice new tenants.
The bottom line is that the market is definitely shifting rapidly in favor of renters; however, if inflation cools and consumer confidence rebounds, that could ignite a stronger demand later this year, which would unleash prices to crawl back up.
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The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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