Apartment rents have been experiencing a significant deceleration for several months, and there are signs that they may turn negative compared to last year.
In August, rents were only 0.28% higher than in August 2022, as reported by real estate tech platform RealPage. This is a stark contrast to the 11% annual growth seen a year ago. With the exception of a brief decline during the Covid lockdowns, negative annual growth in apartment rents has not been observed in over a decade, except during recessions when demand decreases.
However, the current situation is different. Apartment occupancies across the nation are at a healthy 94%, aligning with historical norms. The combination of high mortgage rates, soaring home prices, and limited housing supply have compelled more potential buyers to remain in the rental market. Instead of low demand, the real issue lies in the surplus of available apartments.
The construction of new apartment units has reached a 50-year peak, with over 460,000 units expected to be completed this year alone. In the past three years, over a million new units have been constructed, a record-breaking figure. Furthermore, a significant portion of this supply is concentrated in the higher-end segment. With more options available, renters have greater leverage, resulting in reduced pricing power for landlords as tenant turnover increases.
While national rents have yet to turn negative, several local markets have already seen declines. Austin, Texas (-4.9%), Phoenix (-4.9%), Las Vegas (4.7%), Atlanta (-3.7%), and Jacksonville, Florida (-3.4%) are experiencing the most significant drops.
In contrast, the Midwest and Northeast regions continue to witness robust rent growth. New York is an exception, with rents only rising by 1.9% annually due to a substantial increase in supply hitting the market.
Looking ahead, the supply of apartments is expected to remain high throughout the next year, potentially exerting downward pressure on rents until 2025. However, new construction has significantly declined this year due to financing and other challenges. Consequently, there should be a decrease in supply entering 2026, allowing rents an opportunity to recover.
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