Rents in the US are finally set to decline

But apartments may not get any more affordable if wages fall
Looking to catch a break. 
Looking to catch a break. 
Photo: Lucas Jackson (Reuters)
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The number of apartment hunters in the US has fallen significantly, according to data from rental tracker RealPage. That’s sent a chill through what has been a red-hot rental market as more US renters moved out of apartments than moved in over the third-quarter, the first time this has happened over this period since 1992.

While demand usually declines during the fall months, this year’s drop has been particularly severe, spreading to coastal metros like New York and Los Angeles less susceptible to these fluctuations.

The dip is likely thanks to renters who might otherwise find a new living situation being dissuaded by record prices. As a result, apartment vacancies in September rose a percentage point over the previous month, while advertised rental prices on RealPage dropped by 0.2%. That trend is set to continue.

More apartments are coming

There’s a huge supply of new apartments in the construction pipeline. Builders raced to lock in low-interest rates during the pandemic as millions of people tried to move into new, often larger homes and apartments, especially in the Sun Belt, the region stretching across the southern US from Florida to California.

But builders were not in a hurry to complete them. It remained profitable to focus on new developments as long as demand remained high, said Paul Williams, the executive director of the Center for Public Enterprise. Because multifamily builders don’t need new residents to secure financing to start construction of apartment complexes, they’re often able to build more units than single-family home developers, and base their expansion plans on expectations for US wage growth, rental price increases, and apartment vacancy rates.

But as interest rates have risen, with the Fed raising its benchmark rate to 3%, new construction has become less attractive for developers. Instead, they’re focusing on finishing existing projects with cheaper financing, and renting out those units as soon as possible. “Multifamily investors are really just asking, ‘Am I going to be able to get return on rents over that period?’” Williams said.

That means pandemic boom-time projects will now be completed sooner rather than later. The huge pipeline of units is set to hit the market sometime in the next two years. After apartment construction rose to a 40-year high in 2022, RealPage estimates the 917,000 units being built now will become available in the second half of 2023.

That could drive down rents even further, and increase vacancy rates. That sounds like good news for renters who have been squeezed by a tight housing market. But much depends on how well wages hold up in a volatile economy. The Federal Reserve’s war on inflation is making borrowing more expensive and may slow the economy. If wages fail to keep pace with inflation, or employment falls off, then rent-to-income ratios may not improve and apartment affordability could remain the same.