Report: Apartment Rents Won’t Grow to the Sky

The combination of recession concerns, requests to return to the office, rents that are just too high, and a multi-decade high of new rental supply are all combining to cause apartment rents to soften and potentially decline, writes John Burns Real Estate Consulting.

In a report by Alex Thomas and Jesse McConnico called “Apartment Rents Don’t Grow to the Sky” they write, “Rents are set to fall in many areas around the country, which is exactly what the Fed needs to help get inflation under control. This short-term pain for rental investors should be offset by the long-term gain of a stable economy and lower borrowing rates.

“Every quarter, we summarize the earnings calls of six publicly traded apartment REITs (Real Estate Investment Trusts) for our research clients, and our consultants have been busier than ever helping apartment and build-to-rent developers understand local market dynamics as they build and lease new communities,” they write in the report and in a recent email newsletter.

Why Rents Soared

Rents soared for a couple of reasons, the report says.

It was the combination of record demand due to working from home and relocations, plus capital flowing into apartment construction resulting in a 36-year high of multifamily starts and a 34-year high of multifamily completions.

Even with the level of construction it was still not enough to meet demand.

Recession concerns, requests to return to the office and apartment rents that are just too high are combining to cause rents to soften.
Charts courtesy of John Burns Real Estate Consulting

What Some REITs Told John Burns Real Estate Consulting

  • AvalonBay Communities: “We’ve assumed that [rents] will decline, just at a more modest pace than pre-COVID periods would typically dictate.”
  • Essex Property Trust: “What we are expecting is normal seasonality. We do have headwinds from tougher year-over-year comps. Last year, in the first half, our blended lease rate was -4 percent. But in the second half, it surged to about +13.25 percent. That’s the tough year-over-year comp.”
  • Equity Residential: “We assume we’re going to have rents peak somewhere in this first or second week of August and then have a normal kind of trail off in rents until you get to that January period.”

See what the other REITs had to say here.

Conclusion: Watch Apartment Market for Signs of Job Losses

“Watch the apartment market carefully for early signs of job losses, which is something that the Fed wants and is even forecasting,” the report says.

“The increase in rental demand due to homeownership becoming less attainable doesn’t mean rents can rise to the sky, and the rental market demand/supply balance can quickly turn upside down when job losses coincide with a lot of apartment completions.”

Read the full report here.

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