Tracking rents is important for understanding the dynamics of the housing market. For example, the sharp increase in rents helped me deduce that there was a surge in household formation in 2021 (See from September 2021: Household Formation Drives Housing Demand).
The surge in household formation has been confirmed (mostly due to work-from-home), and this also led to the supposition that household formation would slow sharply in 2023 (mostly confirmed) and that asking rents might decrease in 2023 on a year-over-year basis (now flat year-over-year).
Welcome to the July 2023 Apartment List National Rent Report. The rental market hit a big milestone this month, as national rent growth is finally flat year-over-year after nearly a year of deceleration in the rental market. This means that on average across the nation, apartments today are renting for the same price they did one year ago. This marks a major shift from the recent past, when annual rent growth topped out at nearly 18 percent nationally and over 40 percent in a handful of popular cities.
On a month-over-month basis rents continue to tick up, albeit slowly. Our national rent index increased by 0.4 percent over the course of June, but this monthly measurement of rent growth is gradually declining at a time of the year when it’s normally picking up steam. Rent growth in 2023 has come in at a much slower pace than previous years thanks to a combination of sluggish demand and increasing supply. …
On a year-over-year basis, rent growth is continuing to decelerate and for the first time since early in the pandemic, has fallen to zero. The last time this occurred was from mid-2020 through early-2021, when rental markets were reeling from a dramatic reduction in household formation and dense urban cores in particular experienced a sharp decline in demand for apartments. Seasonal trends suggest that monthly rent growth will continue to slow for the remainder of the year, so it is likely that annual rent growth will sink negative in the months ahead.
The supply side of the rental market also hit a major milestone this month: our vacancy index now stands at 7.2 percent, matching the peak vacancy rate that was measured at the height of the COVID-19 pandemic. With a record number of multi-family apartment units currently under construction, this vacancy rate will remain elevated and for the first time since the early stages of the pandemic and put pressure on property owners to find tenants, rather than the other way around.
Rents increased in June in 73 of the nation’s 100 largest cities, but thanks to sluggish rent growth this year, prices are down year-over-year in 57 of these 100 cities.
But after bottoming out in October 2021, our national vacancy index has been easing steadily for over a year and a half, and the rate of easing has picked up steam since last summer. In 2022, our vacancy index inched up an average of 14 basis points per month, but so far in 2023 the average increase has been 21 basis points per month. In June, the vacancy rate now sits at 7.2 percent, matching the pandemic peak in July 2020.
This easing has shown no signs of slowing, and it’s likely that the vacancy rate will continue to trend even further upward in the months ahead. New apartment construction is recovering from pandemic-related disruptions, and there are now more multifamily units under construction than at any point since 1970. As this new inventory continues to hit the market over the course of the year, we are now entering a phase in which property owners are beginning to compete for renters to fill their units, a marked change from the prevailing conditions of the past two years, in which renters have been competing for a limited supply of available inventory.
emphasis added
Realtor.com: First Year-over-year Rent Decline in Their Data
In May 2023, the U.S. rental market experienced its first year-over-year decline in our data history, down 0.5% for 0-2 bedroom properties across the top 50 metro. The median asking rent was $1,739, down by $38 from July 2022’s peak but still up by $3 from last month and $344 (24.7%) higher than the same time in 2019 (pre-pandemic).
U.S. single-family rent increases dropped on an annual basis for the 12th consecutive month in April, registering a 3.7% gain, significantly less than the 14.2% growth observed in the same month in 2022. Still, overall rental costs are up by 26% since before the pandemic, reflecting continued strong demand and low inventory. As in the previous three months, most of the metro areas for which CoreLogic tracks data saw single-digit annual increases in April, with the exception of Las Vegas, which recorded a decline of less than 1%. …
“Single-family rent growth has slowed for a full year, and overall gains are approaching pre-pandemic rates,” said Molly Boesel, principal economist at CoreLogic. “Prior to 2020, single-family rent gains increased in the range of 2% to 4% for nearly a decade. However, even though growth has slowed over the past year, rents have increased by 26% since February 2020.”
The 3.7% YoY increase in April was down from 4.3% in March.
Rent Data
Here is a graph of several measures of rent since 2000: OER, rent of primary residence, Zillow Observed Rent Index (ZORI), ApartmentList.com and CoreLogic Single Family Rental Index (All set to 100 in January 2017)
OER and rent of primary residence have mostly moved together. The Zillow index started in 2011, the ApartmentList index started in 2017, and CoreLogic in 2004.
Here is a graph of the year-over-year (YoY) change for these measures since January 2015. Most of these measures are through May 2023, except CoreLogic is through April and Apartment List is through June 2023.
Note that new lease measures (Zillow, Apartment List) dipped early in the pandemic, whereas the BLS measures were steady. Then new leases took off, and the BLS measures have followed.
The CoreLogic measure is up 3.7% YoY in April, down from 4.3% in March, and down from a peak of 13.9% in April 2022.
The Zillow measure is up 4.8% YoY in May, down from 5.3% YoY in April, and down from a peak of 17.0% YoY in February 2022.
The ApartmentList measure is flat at 0.0% YoY as of June, down from 1.0% YoY in May, and down from a peak of 18.2% YoY November 2021.
Both the Zillow measure (a repeat rent index), and ApartmentList are showing a slowdown in rental increases in rents. From Zillow:
“ZORI is a repeat-rent index that is weighted to the rental housing stock to ensure representativeness across the entire market, not just those homes currently listed for-rent.”
And from ApartmentList:
At Apartment List, we estimate the median contract rent across new leases signed in a given market and month. To capture how rents change in a market over time, we estimate the expected price change that a rental unit should experience if it were to be leased today.
Both of these measures reflect new leases, whereas most rental units don’t turnover every year (as captured by the BLS measures). The sharp increase in new lease rates in 2021 and early 2022 is spilling over into the consumer price index now (as discussed in earlier article).
The Rent of primary residence was up 8.7% YoY in May down from up 8.8% YoY in April. The Owners’ Equivalent Rent (OER) was up 8.0% YoY in May down from 8.1% YoY in April. The YoY change in OER and in PCE housing have peaked, but will stay elevated for some time, even though asking rent growth has slowed sharply.
Housing (PCE) was up 8.3% YoY in May, down from 8.4% in April (April was the cycle peak).
Conclusion
With slow household formation, more supply comes on the market and a rising vacancy rate, rents will be under pressure all year. Although asking rents increased in June according to ApartmentList, “rent growth is gradually declining at a time of the year when it’s normally picking up steam”.
Since rents increased sharply last year in July, asking rents will likely be down YoY in the next ApartmentList report.
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