The rent boom that’s impacted nearly every U.S. market over the last two years is over.
Since the middle of 2020, rents have soared in the United States, well before inflation was hitting the broader economy. And although rents are still up more than 10% year-over-year, there are signs that rent growth has peaked and is rapidly coming back down to earth.
So what will happen to rent as we plunge further into a deeply unpredictable economic situation? Let’s look at the data to get a sense of what has happened over the last several years, what new trends are starting to emerge, and what might happen in the future.
Staggering Rent Growth
There are many different sources and ways to measure rent, but none are perfect. However, by every measurement I’ve seen (and I’ve seen a lot!), the rent growth that occurred from mid-2020 through the writing of this article has been remarkable.
Let’s use Zillow’s data since it’s well-known and uses a consistent methodology.
Rent growth was growing consistently between 3-5% per year for most of the 2010s. Then, the pandemic hit. In January 2020, the last month before the pandemic impacted the economy, the median rent in the U.S. was $1,641. As of September 2022, the median rent in the U.S. is now $2,084. That’s 27% growth in just over 2.5 years. Wild.
In addition to rapidly rising rents, vacancy has also declined dramatically, and as of Q2 2022, vacancy was the lowest it’s been since 1982.
It’s worth noting that vacancy had been declining sharply since the Great Recession (probably due to the national housing shortage), but the pandemic only continued that trend.
These two things combined—rising rents and lower vacancy—have been a boon to rental property owners over the last several years. Landlords could, generally speaking, on a national level, enjoy rent growth that outpaced inflation with little fear of vacancy.
New Trends Are Emerging
Things are starting to change, though. In the last several months, we have seen a big shift in the economy. The housing market is in a correction, inflation is persisting, and there are fears of rising unemployment. As such, things are starting to change in the rental market as well.
You may have even seen some headlines recently that say, “Rents are falling!” or something similar. I’ve seen a lot of articles talking about this and decided to look into this to see what’s going on.
Rents are still up year-over-year
The best way to measure rent growth is year-over-year data (for example, comparing September 2022 to September 2021) due to the seasonal nature of rent data. Year-over-year data strips out some of the rent variances that occur throughout the year, allowing us to focus on the long-term trends.
On a national level, rents are still up year-over-year. As shown in the graph below, Zillow shows rents to have grown nearly 11% YoY as of September 2022. This would be an incredibly high number in a normal year (nothing is normal these days), but this actually represents a considerable cooling since rent growth appears to have peaked at 17% YoY back in February 2022.
How far the pace of rent growth will fall remains to be seen. But keep in mind this graph shows the “rate of growth.” The declines you see here show that rents are growing at a slower pace. So, what it really means is that rents are not going down at this point, at least on a national level.
First markets to see YoY declines
But what about regional markets? Are any of those starting to decline? To answer this question, I analyzed BiggerPockets’ rent data and found that of the largest 100 markets in the U.S., 96 are still seeing YoY rent growth. The average YoY rate of the top 100 markets is 10% (similar to Zillow’s national average). There were, however, four markets that were negative. Four of 100 is a very small amount, but it represents a shift from the ubiquitous growth we’ve seen for years and something I’ll keep an eye on in the coming months.
The declining markets:
- Spokane, Washington (-6%)
- Reno, Nevada (-3%)
- St. Paul, Minnesota (-2%)
- Minneapolis, Minnesota (-1%)
If you’re curious about what cities are still seeing the highest rent growth, they are:
- Lubbock, Texas (+31%)
- Jersey City, New Jersey (+29%)
- Miami, Florida (+27%)
If you want to download my dataset, which shows median rents, YoY, and MoM growth rates for the largest 100 markets in the U.S., you can download it for free below.
Rents fall month-over-month
Normally, I don’t pay much attention to month-over-month changes in rent (or housing prices). As I said above, because rent prices are seasonal, year-over-year data is the best way to watch the trends. But during a shifting market, it can be helpful to look at this data.
Of the data I’ve seen, the most notable comes from a recent report from RealPage that shows that effective rents for multifamily properties actually dropped 0.2%. This drop, though, is entirely normal. Remember, the seasonal nature of this data means rents usually drop after the summer. The exception to that seasonality was last year in 2021, when seasonality be damned. Rent just kept on growing.
So, as the headline on this graph indicates, the 0.2% drop in rents during September 2022 actually reflects a return to normalcy—not necessarily an indication that rents are going to drop in some unusual way. They definitely could drop more in the future, but this data shows that we’ve returned to a more normal pattern for rent growth.
When I look at the BiggerPockets data, I see that 41 of the 100 markets I analyzed saw month-over-month declines in September 2022. Again, this is what normally happens. Perhaps the most notable part of this is that 59 of the 100 markets are still refusing to behave normally and are still growing into the fall.
Lastly, there are two trends in multifamily rents worth paying attention to.
First, vacancy is starting to come back down to earth. The chart below from RealPage shows that although vacancy is increasing slightly for multifamily units, it’s still very low in a historical context. Note that this chart actually shows “occupancy,” which is just the inverse of vacancy. Occupancy of 95% means 5% vacancy.
This is nothing to worry about yet, as vacancy is still low in historical terms, but it is something to keep an eye on. As inflation continues to negatively impact American renters’ spending power, more people may choose to combine households (live with roommates or family instead of on your own) and lessen overall demand.
That could come when more multifamily units are coming to the market. Apartment construction has reached 40-year highs, with more than 917,000 units underway. Completions are on track to peak in the second half of 2023, with the vast majority competing for higher-income renters at rent levels well above the market norms. There are an estimated 110,000 new units set to deliver in Q4. A combination of increased supply with the potential for lower demand could lead to an increase in vacancy over the coming months, but note this data is for large multifamily apartment buildings.
However, other potentially contradictory data suggests multifamily vacancy for existing properties might not increase so much. New data from Yardi Matrix shows that multifamily tenants are renewing their leases at a higher rate, suggesting that the unaffordability of buying a new house is keeping more renters in place. Because property managers tend to limit rent increases for existing tenants, it’s also usually cheaper for renters to stay in their existing unit than to move elsewhere.
Given these two data points, it seems that vacancy will remain below the historic lows we’ve seen over the last couple of years, but the downside risk isn’t so big for existing units.
Just like with the housing market, the rental market is in a correction. This is normal and to be expected. The level of growth we’ve experienced over the last two years is unsustainable and creates a difficult economic dynamic for tenants and landlords alike.
Even though headlines are sensationalized and suggest rents are in freefall, that is not the case as of now. Instead, rents are falling month-over-month, which is normal during this type of year. Rents are still up year-over-year, but the first few markets are showing year-over-year declines, which could be a sign of things to come.
I’m finding it difficult to forecast rent for next year, but my best guess is that rent will likely grow in the low single digits next year, and I would not be surprised if rent prices turn modestly negative on a year-over-year basis throughout 2023. For a pretty unconfident forecast, let’s call it +/- 4% by the end of 2023. Of course, every market is going to be very different. If you download the spreadsheet that I’ve linked, you’ll see that some markets are already starting to fall while others continue to grow at remarkable rates.
If rent declines are worrying you, remember that even during housing market corrections, rents do not tend to fall as far as much as property prices do. According to the Census, the peak-trough decline in asking rents during the Great Recession was about 6% (Q1 2009 – Q1 2011). Peak-to-trough housing prices dropped 27% in the wake of the Great Recession. Rent prices are a lot stickier than property prices, and when housing is as unaffordable as it is today, it actually can increase demand for rental properties or at least offset declining demand from people combining households.
Given the general economic uncertainty these days, I recommend underwriting for little to no rent increases for the next few years. We’ve pulled forward a lot of rent growth over the last two years, and it’s destined to slow down. I wouldn’t buy any deal at the moment that requires rent to increase within the next few years.
What are you seeing in your local markets and for your properties? Is rent growth slowing down? What do you expect in the coming years? Let me know in the comments below.
A big thank you to Pooja Jindal for her help in researching this topic.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.