Apartment Rental Costs Expected to Slow in 2023

New apartment supply is expected to slow steep rent increases in coming years.

Across the nation, tenants have been struggling to cope with steep rent increases in recent years. However, it seems that the remarkable period of success for multifamily building owners due to the pandemic is quickly diminishing as 2023 begins. 

In the current market, rent prices stand significantly higher than they did a year ago in all but 10 cities across America, as reported by Zumper. Analyzing recent monthly changes in median rent, an intriguing pattern has been uncovered. As per Zumper's report, since its April 2022 peak, the median rent for one- and two-bedroom units in the 100 biggest cities across America has been steadily declining.

Apartment vacancies are increasingly becoming available. An unprecedented influx of rental buildings is anticipated to reduce the rate at which rents are surging across the United States within just a few decades. Rent in many of the much sought-after Sunbelt cities is already declining.

To quell inflationary pressure and bring comfort to those whose salaries are unable to keep up with rental prices, slower rent growth would be a welcome benefit. According to the U.S. Census Bureau, a report in December estimated that 44 million households were renters and 19 million of them spent 30% or more of their income on rent plus other housing costs between 2017 and 2021.

After an explosive period of growth for the residential rental industry, presumably catalyzed by the pandemic's outbreak, a sudden reversal has been observed. Housing economists are beginning to take notice and investigate what has caused this shift in momentum.

After the rollout of COVID-19 vaccines in late 2020, pent-up demand for housing triggered by early lockdowns was unleashed and skyrocketed shortly afterward. A surge of young adults seeking to rent their first homes caused rents to skyrocket by 25% in only two years due to the increased demand.

Highly compensated professionals from the Northeast left for flourishing cities in the Sunbelt region. These individuals had the advantage of working remotely while their salaries afforded them plenty of square footage to live comfortably.

Interestingly, property prices are now plummeting in areas that experienced a surge before, and rental rates have correspondingly decreased. From April to October 2022, Apartment List observed a notable decrease in rents across three major U.S. cities; Las Vegas experienced the most significant drop of 3%, followed by Phoenix with 2% and Tampa with 1%. In the two years prior, rents in all three of those cities saw an astounding increase of more than 30%. 

A factor in the rental cost slowdown is a steady increase in inventory. More and more multifamily buildings are springing up across the U.S.

By the end of 2023, an estimated 500,000 new apartments will have been built, surpassing the number constructed in 1986 and making it one of the most prolific years for apartment construction. Following an analysis from the property data firm CoStar Group Inc., more than 400,000 unit completions are predicted to occur in 2023.

The infusion of new apartments into housing markets that are experiencing a slowdown is anticipated to slow rent increases and keep costs under control. Moody's anticipates rents to increase by roughly 3% across the nation in 2023, significantly lower than half of what was recorded last year. 

Certain cities that have experienced a surge in construction could possibly experience an entire year of declining rents. Particularly noteworthy are Miami; Austin, Texas; and Raleigh, North Carolina, with a large number of new real estate openings projected for 2023.

Despite some headwinds, the rental sector is still experiencing tailwinds. Homebuyers have been pushed to rent due to higher mortgage rates and sky-high prices, creating an increased demand for rental properties such as houses and apartments. Analysts expect that, although new rental buildings will be built, the majority of cities likely won’t have an adequate supply of affordable housing units to meet demand. Analysts believe that these factors should assist in keeping vacancies from growing too much and keep rental prices from going down in most cities.

As rental cost increases gradually slow, it's an indication that inflation is progressively growing more manageable. It will take some time for the recent rent drops to be reflected in the government's Consumer Price Index due to how this data is collected and reported. Evidence of past recessions demonstrates that the rental industry is far more robust than other areas of the economy, as people are less likely to reduce their expenditures during bear markets. Investors are recalibrating their expectations to suit the more difficult environment.