Commercial Magazine

Is the apartment market slowly leaking air?

By Jeff Bond

Another sign of the cooling economy came into focus a few months ago as evidence emerged that apartment rent growth had stopped its epic rise of nearly two years. According to real estate analytics provider CoStar Group, asking rents either fell or were flat from July to August of this year in 80% of the nation’s top 40 multifamily markets.

Many of the cities that saw rents fall are in the Sun Belt, including Nashville, which notched the biggest decline among these 40 markets at 1.1%, and Austin, which was down 1%. Other markets that recorded significant declines were San Francisco, Las Vegas, Raleigh and Orlando.

A lot of potential household formations just aren’t happening because of the higher inflation and interest rates that are affecting people’s expenses.

— Jay Lybik, national director of multifamily analytics, CoStar Group
Sure, these are minor when compared to the run-up in rent prices over the past two years. CoStar reported that year-over-year rent growth in Orlando and Miami, for instance, reached a respective 12.8% and 12.4% in August. Still, some experts believe that a change has arrived. When you combine skyrocketing rents with the current inflation rate, rising interest rates and a general sense of unease about the economy, the result is a possible reversal of market forces.
Jay Lybik, CoStar’s national director of multifamily analytics, says the apartment market is experiencing lower demand than anticipated right at a time when a large supply of new rental units are being delivered. These forces have flipped the market from one where demand significantly outstripped supply to one where supply is currently exceeding demand. Due to these conditions, the “mind-boggling” rent increases of 2021 are pulling back.
“I’ve been in the industry since 1999 and never in my wildest dreams did I think that we’d see rent numbers like we did last year,” Lybik says. “But there is so much uncertainty right now in the economy that I believe a lot of potential household formations just aren’t happening because of the higher inflation and interest rates that are affecting people’s expenses.”
Lybik pointed out that many of the cities that saw the highest rent growth in 2021 are now leading the pack downward. Atlanta is one example that Lybik pointed to for how the market has changed. Through the first eight months of this year, renters absorbed fewer than 2,500 of the city’s vacant apartments. But in second-quarter 2021 alone, Atlanta renters absorbed about 8,000 apartments.
“In our data, we saw the rents peak in July (2022) on a national basis,” Lybik says. “And August was kind of the first turn of the worm, I would say. There were some markets that saw erosion at the beginning of the summer, but it was only two or three. So, to me, July was the inflection point.”
CoStar isn’t the only real estate data provider to uncover the slowdown. Apartment search and analytics firm Zumper found that the median rent price peaked in April 2022 and had slowed significantly by September. Although Zumper’s numbers don’t always match CoStar’s, they also reflect a cooling market. Zumper reported that 47 of the 100 largest rental markets in the country showed either negative or flat rent growth for one-bedroom apartments from August to September of this year.
Zumper reported monthly rent declines of 5% or more in Cincinnati; Lincoln, Nebraska; El Paso, Texas; and Winston-Salem, North Carolina. Its data seemed to point to a minor but widespread pullback in Florida, where cities such as Jacksonville, Miami, Orlando, St. Petersburg and Tampa saw reductions in rents.
“Prices are slowly beginning to level off in much of the country,” Zumper spokeswoman Crystal Chen writes in an email. “These aren’t major price drops; they’re more of a normalization following the stratospheric, nonstop price increases we saw throughout most of the pandemic.
“Now as fears of a recession spread and many workers are called back to the office, that migration is beginning to slow. So, we’re seeing prices slowly begin to normalize in many of the markets that saw the biggest influx of new residents during the pandemic, especially in cities such as Boise, Denver, Miami (and most of Florida) and Nashville.”
So, could this change in rents mark the start of a bursting market bubble? Both CoStar’s Lybik and Zumper’s Chen don’t believe anything quite that dramatic is occurring yet. The demand for housing remains high and supply simply hasn’t caught up yet.
“We don’t expect a bubble bursting,” Chen writes. “The demand for rentals is still quite high and the rental market remains strong. What we’re seeing is a slow normalization in many markets, where instead of nonstop price increases, we’ll eventually return to more seasonal price patterns.”
Lybik says that CoStar’s preliminary September 2022 data showed that nationwide rents were still declining, but he didn’t go so far as to classify it as a bursting bubble. He worries, however, whether federal officials can somehow avoid a recession while squeezing inflation out of the economy.
“My 2023 outlook is that rental demand is going to start coming back,” Lybik says. “But it’s going to depend on if the Federal Reserve can engineer this economic soft landing they talk about and we can get rid of this horrible uncertainty that’s really hurting consumer confidence right now.” ●


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