The Great Rent Shakeup: Are Rents Collapsing Across the Country?

by | BiggerPockets.com

“What if housing markets collapse?”

It’s a common fear we hear from our students. After all, no investment is 100 percent guaranteed, right? Stocks, mutual funds, ETFs, real estate values – all of them can go down as well as up.

Occasionally, even rents dip under the right (or wrong) conditions.

While most cities, suburbs, and rural areas nationwide are seeing rents rise, we’re experiencing a surprise drop in the most expensive cities. But after years of unsustainable growth, is it really so surprising?

Here’s what’s happening in the nation’s largest cities, and perhaps more importantly, why it’s happening.

Rents Are Declining in Top-Tier Cities

According to Zumper’s September rent report, seven of the 10 most expensive cities in the country have seen rents decline from peaks in 2015 and 2016.

Of the three cities where rent hasn’t declined, two cities’ rents only rose by a fraction of 1 percent.

Here’s a list of these most-expensive cities, and how rents have changed — both year-over-year and since their peaks:

Related: 25 Single Family Rental Markets Predicted to See the Largest Growth in 2017

Chicago rents fell so far that the city — the third largest in America — is no longer even on the top-10 list (more on Chicago later). Rent for a 2-bedroom apartment in New York City fell almost 20 percent from its peak last year. Honolulu saw 2-bedroom rents plummet nearly 23 percent from its peak in 2015.

Meanwhile, home prices have continued to rise. San Francisco saw home values rise 10 percent over the last year, even as rents fell. New York City saw a similarly strong 9.3 percent rise in values. Honolulu saw a solid 4.8 percent rise in housing values.

In other words, rents and prices are diverging in these most-expensive cities, and not in the right direction for investors.

The Rise of Mid-Tier Cities

Don’t get too terrified about rental investing just yet. Nationwide, asking rents are up 3.2 percent year-over-year.

Not only is the rest of the country seeing rents rise, rents are rising significantly enough to counterbalance the rent collapse in the largest cities.

Even among other large cities, rents are performing better outside of the top 10. Among the 11th25th most-expensive cities, most saw rents rise year-over-year:

And once you get into the 26th50th most-expensive cities, nearly all of them saw rents rise, many with double-digit growth:

Alongside rents, home values nationwide are also on the rise — up 6.8 percent over the last year according to Zillow.

Why Are Rents Falling in Top-Tier Cities?

Let’s start with the simplest answer – some of these cities were previously experiencing a rent bubble.

Look no further than the Bay Area. From 2010 to late 2015, San Francisco’s rents skyrocketed an alarming 68 percent, from $1,900 to $3,200. In San Jose, they leapt 75 percent, from $1,600 to $2,800.

And now the piper has come calling.

Look at how top-heavy the rents are, among the most expensive cities. The rent for a 2-bedroom apartment in San Francisco is double that of a 2-bedroom apartment in the 10th-most expensive city, San Diego. And in turn, a 2-bedroom in San Diego is nearly twice as expensive as a 2-bedroom in the 25th most expensive city, Madison, Wisconsin.

Outside the top-10 list, rents remain far more affordable, even in the nation’s other major cities. In Philadelphia, a 2-bedroom apartment averages $800–$1,600 per person. Atlanta 2-bedroom apartments average $1,690; Denver, $1,800; Baltimore, $1,500; Pittsburgh, $1,330.

Demand has started shifting from desperately expensive cities like San Francisco and New York. Millennials — who for a decade led the resurgence in demand for urban living in the nation’s largest cities — have been dispersing to mid-tier cities. In doing so, they’ve been driving demand and rents up in these cities, while rents collapse in the overpriced top-tier cities.

Millennials aren’t just leaving the largest cities for mid-range cities; they’re also moving out to the suburbs.

The Second Wave of Suburbanization

Last year, among homebuyers, millennials comprised the largest cohort at 42 percent. And guess what? They were overwhelmingly moving to the suburbs, not to cities.

Nearly half of millennial homebuyers bought in the suburbs. A third who bought in urban neighborhoods. The remaining 20 percent bought in rural areas.

This trend doesn’t only exist as a blip in a few numbers. Industry analysts have noticed the suburban trend as well, based on a wide range of anecdotal and statistical evidence.

Why are millennials moving to the suburbs? For many of the same reasons their parents and grandparents did: they’re having kids, they want more room, they have pets, they want a yard, they want better schools.

Another unfortunate reason is that violent-crime rates have spiked in cities since 2014 and 2015, following more than 25 years of decline.

And of course, tax burdens tend to be much higher in cities. In my home city of Baltimore, the property-tax rate is double that of the surrounding county. The City of Baltimore also imposes a higher income tax, unlike most nearby counties.

I love urban living, but many of America’s largest cities don’t offer much of a sales pitch. Who wants to pay higher taxes to live in less-safe neighborhoods with shoddier schools? Fewer and fewer millennials, apparently.

Case Study: Chicago

Consider the nation’s third-largest city.

Chicago saw its population drop by 9,000 people last year. At the same time, over 26,000 new rental units were built in the multifamily industry alone. This does not include new single-family rentals, or derelict properties that were renovated and put back the market, or for-sale new homes and condos.

As mentioned above, violent crimes spiked in the meantime. Chicago saw 11.4 percent more homicides last year than in 2015.

In other words, demand is down and supply is up. And it’s evident in Chicago’s rents: since peaking in 2015, asking rents for a 1-bedroom apartment have plummeted by an unprecedented 26 percent, according to the Zumper data.

Chicago, like many large U.S. cities, finds itself mired in a fiscal swamp of its own making. Chicago’s pension debt alone is $33.8 billion. The city’s bonds are rated junk status by Moody’s. They’re raising taxes in every conceivable way, resulting in the average Chicago family paying $1,692 more per year than they did just five years ago.

Is it any wonder its residents are fleeing to the suburbs — or to cheaper, safer cities?

Related: The Ultimate Guide to Analyzing Rental Properties (+ Free PDF!)

So What’s a Rental Investor to Do?

Pay attention.

What demographic changes are taking place in your city?

Are young adults moving in or moving out? Are violent crime rates rising or falling? How are taxes — compared with surrounding counties and comparable cities?

Remember, rents are rising almost everywhere nationwide. If you live in one of the handful of larger cities where rents are slipping, start looking elsewhere.

The U.S. is chock full of excellent markets to invest in. These markets may not be just around the corner from your home, but that doesn’t mean there are no opportunities. You may just have to look outside your own backyard to see them.

What have you seen in your city? Are rents rising or falling? Why?

Where are you considering investing, if not in your home city?

About Author

Brian Davis

Brian is a rental investor with 15 income properties, who provides free video training to help everyday people start earning passive income at SnapLandlord.com. He's also the co-founder of SparkRental.com, which provides free services & education for landlords. His rental management is almost completely automated by now, allowing him to travel the world (his current home base: Abu Dhabi).

52 Comments

  1. David Krulac

    @Brian Davis
    Excellent in depth article, one of your finest if not the finest. We’ve been investing in what you would call the third tier, and the last time we saw or actually lowered rents was in the 1980s. Since then including 2008, we never lowered rents and have raised rented every year.

    The rising real estate taxation and the crime rates, along with degradation of the public school systems have driven more than millennials out of the cities. At the extremes in my investing area real estate taxes are SIX times higher than the real estate taxes in the lowest areas within my investing landscape. Suburban taxes are lower, crime is lower, and the schools are better, and as a result the demand for housing is up, sales volumes are up, sale prices are up and rents are up

    • Brian Davis

      Thanks David! It was a lot of work to research, so the feedback is much appreciated.
      I hear you 100% about the differential in taxes. A six times difference in tax rates is just asking for middle- and higher-income residents to flee elsewhere. I’m an urban-dweller at heart, but the largest cities are in for a rude awakening when the second wave of suburbanization really hits.

      • Thanks for this Brian. The “second wave of suburbanization” is quite interesting, and should prove to be positive for SFR rentals and sales. I see this as possibly corresponding to the echo-boomers reaching their mid 30’s to early 40’s, which I think should be in the 2025-2030 timeframe. Have you looked at the impact of the echo boom as it relates to suburbanization? Could be an interesting follow on to this article…

        • Brian Davis

          I think it’s coming, and sooner than that. I do intend to write a follow-up article, although it may be a little more of an opinion piece, and I may get a little snarkier about how much the housing activists will miss gentrification once those millennials leave cities 😉

        • Kevin Polite

          I didn’t see anything in the article anything regarding supply. During the recession there was very little addition to the the supply chain so when the economy turned around you had a lot more new households but not a lot of supply, therefore you had, in my opinion, the reason for a large increase in rents. As the multi family developers in large cities started throwing up (literally) new apartments supply caught up to demand and you’re just now having a price decrease.
          You mentioned San Fran which had a 68% increase in rents from 2010-2015 but a 5% decrease last year. That’s still a mighty high increase.
          As far as millennials moving to the suburbs , I doubt that every millennial that moved into the city is moving out. For one they are having kids later in life or not at all. Secondly, when they do have kids and they can afford to live in the city they go to private or charter schools. Also, most intown areas, in large cities, include large numbers of singles, gays and older couples downsizing or staying because the area has changed so much and they have a lot of equity so they remodel for older age or get that “new” home in an area they love and don’t want to leave. In addition, if the city is growing then most of the new folks to the city will be from other large cities who want to live in the city. In the past people moved from cities because they were declining and that is the opposite now, especially as walkability has become so important.
          Just read a good book called “Big Shifts Ahead, Demographic Clarity for Business” by John Burns and Chris Porter. They point to millennials moving to suburbs that make themselves more dense and redefine their “downtown” areas. However, all the points I mentioned above they have in the book so it’s a big contradictory to me.

      • Eric Bilderback

        Thank you for this I’m sure it was a bit work. I will be looking forward to your article on gentrification. So you think the youngsters will flee those new hotspots? And they will not be replaced by the folks a little younger then them. That is an interesting hypothesis get going on that article would you!?

        • Paul B.

          I agree…so the Millennials are old enough for the suburbs. But what about the next generation? Don’t they want to live in the city?

          Also, what happened to the notion that Millennials are lazy and won’t/can’t find a good job, and have crushing student debt? They are not all buying houses. The only question is how many fall into each camp.

  2. Vinay H.

    With rents falling, can the slow down of the condo price appreciation in these cities be far behind? Another reason rents are falling is that is has become more attractive and easier to buy than to rent. However, with double digit price appreciation, it is now becoming more economical to rent than to buy. As an example, you can rent a 2 bedroom condo in Cambridge, MA for 2.5 to 3k whereas ownership comes to around 3.5 to 4k with taxes and condo fees included.

    As an investment, buying for rental in these cities have become cash flow negative. As more investors leave or stay away from those markets, the price of the apartments they will be selling will fall. The data shows that Boston rents are still rising but I can vouch for the fact that some rental ads are now offering reduced fee or one month free as a concession.

    • Brian Davis

      You raise a great point about incentives Vinay – the rent data I cited above does NOT include incentives (which are harder to measure accurately). Still, a jump in incentives are an early indicator that a market is shifting to become a renter’s market rather than a landlord’s market.

  3. Erik Whiting

    Glad to hear the news that over priced markets are correcting because that leads people to my town: 3rd tier (or maybe even 4th!) in the Mid West. I’ve seen rents for my 2 bed SFH’ go from $450 up to $550 and up over the past 2 years, and there’s no sign it’s slowing down. I can still buy livable houses for under $30K here; these are the often mocked “pigs”. No appreciation to speak of, but rather than pigs they are cash COWS. The 2% rule is easy to find here and getting easier all the time as rents continue to climb and lower income house prices stay flat. These aren’t war zone houses either: just older and in less desirable neighborhoods for home owners. That’s fine with me.

    These little blue collar “ATMs” produce great cash flow. Imagine buying a house and within 4-5 years you earn back in NET RENTS what the entire purchase price of the house is, plus you own the house free and clear. Cash flow is king in my town, and it’s what I seek personally.

  4. Scott Trench

    This was a fantastic article. Your data and conclusions make sense to me – anecdotally, I know many people moving out of some of those cities (like Chicago) and moving to the mid-tier markets, like Denver, Baltimore, Nashville, Charlotte, and pretty much all of Texas. Personally, I specifically chose not to move to an expensive city, because I felt that the costs of such a city were not outweighed by the benefits.

    I haven’t personally seen the mass movement to the suburbs, but maybe that’s because I’m still on the middle/younger side of the millennial generation. I suspect that as I eclipse 30-32 years old, that this trend will become more apparent.

    • Brian Davis

      Thanks Scott! Articles like this take a lot of research, so I really appreciate the positive feedback.
      I agree, the second wave of suburbanization hasn’t hit in earnest yet. But I believe strongly that it will, and when it does, we won’t be able to hear the end of it from the pundits.

  5. Eddie Lehwald

    Another great article, Brian! Here in Austin (which I was actually surprised to see so far down on the list), taxes are sky-high and both rents and housing prices keep climbing-I feel like there’s an inevitable correction on the horizon, but few other people seem to think so.

    • Ryan Wilson

      Eddie, according to the article and the data Brian posted, Austin rents have started to decline. It is inevitable as Austin prices are so high compared to surrounding areas. I am good friends with a very successful commercial banker from Wells Fargo and he told me that they have been tapering back lending in Austin as cap rates are just way too compressed and they can’t justify lending in the current environment. Too much risk. If Austin ever does see a serious correction, you better back up the truck and load up on as many properties as possible!

      • James K.

        I have lived in Austin for past 7 years. It’s very hard to see rent concessions in Austin all these years except past 6 months. Some of the past 7 years 100% occupied apartments in great locations have started giving move in specials. Will be interesting to see what happens here.

  6. Scott Hibbert

    Great article Brian! And very timely for me as I move from Boulder to Oakland this week for a new job. I am hoping to buy a small multi-family in Oakland within the next 6-12 months and this article has definitely given me reason to be cautious and check my enthusiasm before creating a possible negative investment valued off high rents today that could continue declining.

  7. Ryan Wilson

    Excellent article! So many articles that get posted and e-mailed to me from BP are, to put it nicely, not that beneficial or educational. They are marketing pieces for the author to “build credibility” through BP and get name recognition. I wish many of these authors would focus on putting out less quantity and more quality.

    Your article is a prime example of what I wish others were doing more of on BP. Thank you for taking time to put together a valuable piece instead of just throwing something up. Super insightful!

    Thanks again!

  8. John Murray

    Brian you hit the nail right on the head. I have invested heavily in Portland Oregon. Within the city limits there is very few suburban neighborhoods. I have $3M in inventory in SFH rentals in suburbia. I will BRRRR 2 and buy 2 more in 2018. When the millennials are through playing hip urban people, I will sell all my inventory to them for a premium. Now they too can have 2.3 children, white picket fence and a back breaking mortgage. Then I will go surfing, skiing and anything else I want to do. .

  9. Jerry W.

    Brian,
    Excellent article. You provide a very good look at market trends that is hard to come by. I have seen a lot of cutsy articles lately with things like just get a good team and you will make money, just be polite and talk your business up, etc. Articles with real meat and research on current market trends are truly gems. Thank you for taking the time to share your hard work.

  10. John Barnette

    Had tenants move out of a SF condo in a gentrifying area. Purchased for $500k in 2013. Decided to sell and 1031. Sold for $700k to another investor! Took my funds and invested in a small 8 unit building in blue collar non rent controlled “suburb” of Oakland/SF. San Pablo, CA. Got a place off the MLS, 11.5 GRM, decent condition and operating expenses, under market rents. Had some turn over and have increased rents. Learned quite a bit from Bigger Pockets articles. True managing a 8-plex in a C kind of neighborhood is more challenging than renting a condo to 3 CAL Berkeley graduates in the Big City. SF. Lots of new fancy apartment construction, slower job growth than 2009-2015 but still growing, and lower rents. However I am getting higher rents in starter apartments in a working class community 40 miles or so from downtown SF.

  11. Crystal Stranger

    This points to some real demographic changes that I agree with, but I think you are leaving one big factor out- AirBnb. One of the reasons the rent values were pushed up so much in SF and NYC was the spread of AirBnb, now that has shaken out a bit and many landlords realized how much work it is, so more long-term rental units are back on the market than two years ago. This still remains a wild card, however, as short-term rental sites are still growing rapidly. And there are a few new real estate “gurus” (including an old friend) marketing programs that teach AirBnb arbitrage, i.e. how to rent houses and then sublet them on AirBnb. We have 8 AirBnb properties now, in Hawaii and New Mexico, and the growth has continued. I had thought the Honolulu market was oversaturated this spring, but it has picked up again and we are booked through the beginning of next year there again, with prices rising.

    Additionally, a demographic shift that is often overlooked in the housing world is that when a generation starts having children it becomes more reasonable to take driving vacations than flying. We have a four year old and a seven month old, and we are pretty much the only family we know who takes more than one international vacation annually. We recently bought a vacation home (that we also will AirBnb) because we wanted somewhere we could get away to at a short drive, and rather than renting it seemed a good value to buy. Right now many vacation areas, even in populous states, are priced where they are still highly cashflow positive, and I think this vacation home demand will rise significantly in the next five years, which will help slow rent value slides in urban markets and increase the values in far-flung areas.

    • Brian Davis

      Thoughtful comments Crystal. Airbnb may have contributed to the run-up in rents in top-tier cities like New York, and since New York effectively banned most Airbnb usage, it’s possible that has depressed rents again. Tough to say for sure without a statistician handy to run a study, but it’s a real possibility.

  12. Jiri Vetyska

    I can see why Chicago is falling out of grace. Chicago and the whole state is loosing population for years now.
    I lived there between the past two recessions and you could see the environment change every year. So glad I don’t have to be forced to contribute this corrupt state anymore! These are tough times for the Midwest.

  13. Paul B.

    What about all the Millennials that can’t afford to buy a house? Either they have student debt, they can’t find a good job, or they are just lazy (fulfilling the stereotype). Won’t they continue to live in apartments, presumably in the city?

    • Brian Davis

      Perhaps, but surveys among millennials show that a majority (even current urban dwellers) intend to move to the suburbs over the next five years. I’m going to research this further for a follow-up article (although it may be more opinionated and controversial than this piece, which I tried to keep neutral).

  14. The pattern I am noticing is the denser and more “urban” cities, saw their rents drop. Chicago, New York, San Francisco and Oakland, which all saw declines are all very dense and very urban. LA and San Jose which saw large increases are more spread out and have a larger share of suburban SFH’s

  15. Marcus Auerbach

    Great article Brian, digging the data. We are in Milwaukee and pay close attention to whats going on across the state border, just an hour away, in Chicago. Illinois has not been doing well the last years. I have seen it in the last ten years every time when I drive down to Chicago O’Hare airport I pay attention to commercial construction along the freeway. The corridor has been filling in nicely, but most of it happens to be just noth of the State line. Amazon and now Foxconn are great examples. Companies are choosing to be as close as possible to the Chicago Metro area, but just outside the State line. The writing has been on the wall. I had coffee with a Chicago investor – we both had sewer laterals fail on one of our properties this summer. He had to pay $6500 just in permit fees – that’s about what my total job cost was. That puts things a little in perspective.

  16. Fay Chen

    Hey, Brian, thank you for the detailed analysis. It’s definitely an interesting trend, giving all the new developments across the country. Maybe I can add a few of my observations:

    1) Going back to your first table. The growth for LA is 0.9% in 3 months, from 5/2017-8/2017. Seattle is 0.5% in just 1 month! San Diego grew 3.1% in 7 months 1/2017 – 8/2017.

    2). There’s seasonality in rent, especially asking rent for large apartment complex. The first 2 tables provided are comparing rent from different months. It would be interesting to see what the numbers look like adjusted for seasonality. I found this article on rental seasonality for 2016, which includes some of the large cities mentioned.
    https://www.renthop.com/study/national/seasonality-2016.html

    3). I’m not sure if it’s a trendy thing, but I’ve seen a lot of people doing house sharing, especially in large cities.

  17. Margaret DelColle

    Great Article. Thank you so much. My husband and I were just talking about the direction of rents. We have 12 properties in Philadelphia. Rents are climbing and Sale Prices are going thru the roof. We are both realtors and houses are going under contract with multiple offers and over asking. The millennials are buying them up with gift money from their parents. Some parents are paying cash to get their children homes. Also a lot of people coming into the city from the suburbs downsizing. They want to be in Philadelphia as the city is exploding. Their idea of downsizing surprised me as they still want 4 bedrooms, 4 baths, garages and 3000 Sq. Ft plus. We will continue to buy investment properties but the prices are going up. We have investors from New York that can’t believe the prices and low taxes. Fingers crossed for the future. I look forward to reading more articles from you.

  18. Dylan Tettemer

    Thank you very much for putting the work in on this article and getting this info out there. This came in handy for me because I am looking for areas around where I am moving to invest in, so I will definitely keep this in mind! I feel like a good example of this is the mass of millennials moving to the Charleston, SC area. It has a great feel to it and is a great area to raise a family and grow up.

    • Brian Davis

      I’ve heard that as well about Charleston, and the stats back it up. In fact, you should hear my brother in law talk about how much he wants to move there! I’ve actually never been, but it seems like it has a lot going for it.

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