By Ashley Fahey | National Observer: Real Estate Edition
The for-rent housing market looks to be heading into a slowdown as rents dropped in August, according to at least a few trackers of the apartment industry.
CoStar Group Inc., through its Apartments.com platform, found rents declined 0.1% between July and August. The U.S. median rental price declined from $1,781 in July to $1,771 last month, according to Realtor.com. RealPage Inc., though, found same-property asking rents for new leases climbed 0.4% between July and August 2022.
On an annual basis, asking rents increased 10.5% through August, the latest deceleration in rent growth after the market hit its peak of 15.7% annual growth in February, RealPage found.
The apartment sector has proven resilient through most of the pandemic, although growth was flat or even slumped through much of 2020, especially in coastal gateway cities. But last year saw a remarkable rebound, with the national apartment market posting anywhere from a 10% to 13.5% increase nationally in 2021, depending on the data source. Many markets far exceeded that rate of growth.
This year, rental-rate growth has remained strong, although the rate of growth started to slow this spring and summer. Inflation, higher interest rates and a record amount of new apartment construction are hampering the ability for investors to push rents, and to buy or sell properties, at the numbers achieved in the past 18 months.
Keep an eye on the Sun Belt
Analysts at Newport Beach, California-based commercial real estate research firm Green Street LLC also say markets with continued job growth will translate to need for housing. In particular, corporate relocations to states like Texas, Tennessee and Florida were cited in a residential market analysis by Green Street this month.
But not all Sun Belt markets will see the same outcomes, Green Street analysts say. They said while places like Phoenix; Charlotte, North Carolina; and Washington, D.C., will likely continue to benefit from incremental job growth, on a relative basis, those markets are losing steam to other cities and states.
Phoenix was cited as a potential worrisome market by RealPage in its August rental report, as asking rents there dropped 0.4% in August — that market’s first month-over-month decline since May 2020.
In fact, Sun Belt markets have seen the biggest and most sizable retreat in rental-rate growth, after leading the pack during the pandemic. Markets like Orlando, Florida; Austin, Texas; Fort Lauderdale, Florida; and Charlotte posted negative month-over-month rent growth in August, CoStar found.
Cities that continue to see job and wage growth may allow apartment owners to still push rents. Income migration from pricey Northeastern and West Coast cities to Sun Belt markets like Austin and south Florida means those renters are generally more tolerant of higher rents, given their new rent is still a discount on a relative basis.
Rent-to-income ratio starts to become problematic at around 30%, according to Green Street, and most multifamily REITs have disclosed low 20% ratios in recent months.
Green Street’s analysis found apartment REITs are reporting applications from prospective tenants coming from out of market into the Sun Belt are about 15%, or 5 percentage points higher than pre-pandemic. That suggests migration to more affordable cities is continuing to take place, even as the the Covid-19 virus’ direct impact on real estate fades.
But for many U.S. renters, the cost to rent remains a challenge, especially with continued high inflation. Realtor.com found Americans spent 26.4% of their monthly budgets on rent on average, nationally in August. That’s close to, but still less than, the 30% generally accepted benchmark for how much a household’s income should go towards housing.
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