January is often the month when asking rents begin to rise, following a period of stagnation or even decline throughout the winter months. As we move past the holidays and look toward spring, we expect rental demand to increase. However, the key issue facing the rental market is whether this growing demand will be sufficient to absorb the influx of new supply.
Since the beginning of the pandemic, rental prices have surged 29.4%, averaging an annual increase of 7% over the last four years. However, nearly two-thirds of this increase happened in 2021 alone. Following this sharp rise, a boom in apartment construction and a slowdown in economic growth have taken the heat off. Currently, rents are up 3.4% compared to last year reaching $1,958 according to the Zillow Observed Rent Index (ZORI). This annual growth rate is significantly lower than the pre-pandemic average of approximately 4.1% observed in 2018 and 2019, by more than 70 basis points.
Rents are up from year-ago levels in 47 of the 50 largest metro areas. Annual rent increases are highest in Providence (7.7%), Hartford (7%), Cincinnati (6.8%), Louisville (6.6%) and Boston (6.3%).
Rents fell, on a monthly basis, in 16 major metro areas. The largest monthly drops are in Austin (-0.5%), San Diego (-0.4%), Buffalo (-0.4%), Dallas (-0.3%) and Riverside (-0.3%).
The most expensive markets have changed
The hierarchy of the nation’s most expensive rental markets has shifted. San Francisco, previously the second priciest behind San Jose, has dropped to fourth, now trailing New York and Boston in terms of housing costs.
Rent increases in Seattle and Washington, D.C., have lagged behind those in other high-cost metros, with Seattle falling out of the top 10 most expensive markets, supplanted by Sacramento. Both Seattle and Washington, D.C. were surpassed in growth by Riverside, California, and Miami, Florida. Notably, San Diego’s rental prices have eclipsed those of Los Angeles.
The rental market has undergone significant changes during the pandemic. With a near-record number of units still under construction, the landscape continues to evolve, though not uniformly across all regions.
Shifts in rental market incentives
As the growth rate of asking rents remains subdued compared to pre-pandemic standards for this season, early signs suggest the temporary surplus of available rentals is being met by sufficient demand. TThe national vacancy rate for rentals held steady at 6.6% in the fourth quarter, just a point higher than the record low set in the final quarter of 2021. Moreover, the proportion of Zillow rental listings offering concessions began to decrease in January, dropping by 0.7 percentage points to 31.9% after increasing for seven consecutive months.
The share of rentals with concessions is lower, on a monthly basis, in 31 major metro areas. The most significant drops were observed in Salt Lake City (down 3.4 percentage points), San Jose (down 3.3 percentage points), Boston, Cleveland (both down 2.9 percentage points), and St. Louis (down 2.8 percentage points).
Despite these improvements, deals remain abundant for renters actively looking to sign a new lease. Nationally, the percentage of rental listings advertising concessions is still 6 percentage points higher than it was a year ago, with annual increases reported in 44 of the 50 largest metros. The largest year-over-year increases in rental listings offering concessions were seen in Salt Lake City (up 26.5 percentage points), Raleigh (up 18.8 percentage points), Charlotte (up 18.5 percentage points), Austin (up 17.7 percentage points), and Jacksonville (up 17.4 percentage points).
In some markets rental concessions are still increasing on a month-over-month basis including Richmond (up 4.5 percentage points), Las Vegas (up 2.5 percentage points), Philadelphia (up 2.2 percentage points), Pittsburgh (up 1.8 percentage points), and San Antonio (up 1.6 percentage points). Under rising concessions, asking rate rent growth tends to be flat or much slower to grow, likely giving renters in these markets more breathing room to come.
Strength behind single-family rent growth
In contrast to multi-family rentals, where monthly asking rents continue to decline and have only increased by 2.7% from last year, single-family rentals are experiencing more upward pressure. Single-family rentals have not seen the same surge in construction as the multi-family sector. This situation, combined with high barriers to homeownership and a scarcity of for-sale listings by existing owners, has resulted in a 4.7% increase in single-family rent from last year. Currently growing at a pace more on par with pre-pandemic pressure, single-family rent growth is expected to remain stronger than apartment rent growth well into 2024.
Rent affordability sees slight improvement amid softer growth
Softer rent growth is ultimately good news for today’s renters who have faced significant financial strain from both general and rent inflation throughout the pandemic. With wage growth now slower, but still persistent, rent affordability, the share of a typical household’s income that would go to market rate asking rent, stabilized over the past year at 29%. That’s down a percentage point from the record high set in June 2022.
The most affordable metro areas for rents are Minneapolis (19.8%), St. Louis (19.8%), Salt Lake City (19.9%), Austin (20.4%), and Buffalo (20.4%). The least affordable metro areas for rents are Miami (42.4%), New York (38.3%), Los Angeles (36.5%), Tampa (33.4%), and Riverside (33.3%).
But that assumes you’re the median household, the one experiencing income gains to chase higher prices. Taking the market rate rent, the income necessary to afford rent rose to $78,304 in January, marking a 3.5% increase from the previous year and a staggering 29% rise since before the pandemic.
Future outlook for rental markets
The macro economy – meaning prices, jobs and income growth – should continue to slow down. This change is all about trying to slow down inflation and ease the financial squeeze on people who haven’t seen the perks of a booming market. A slower economy generally means slower rent growth.
Near-record levels of apartment construction across the country should maintain subdued pressure on the rental market. That said, people don’t stay in one place. This coupled with the diverse standards and lifestyles offered throughout the country means we will continue to see movement. The number of young adults, who are at their prime working and moving age is entering its peak. Consequently, we may see a resurgence in rent growth, especially in growth markets, in the foreseeable future.
