5 Reasons Why Rents Are Rising At A Record Pace

SOURCE: Yardi Matrix

In spite of rising rents, apartment demand remains high, influenced by new migration trends and renters who are willing and able to pay higher rents. Check out some of the top trends pushing up rent prices across the country:

1. Inflation

The Consumer Price Index rose 7.9% year-over-year, driving inflation to a 40-year high. The impact of inflation on the goods and services required to build rental properties is adding to the cost of development, which in turn raises the cost of housing.

In the latest quarterly construction survey by the National Multifamily Housing Council, respondents reported a 45% increase in lumber prices on average over the last three months alone. Inflation impacts rental housing not only through building supplies but through labor and oil as well.

2. A shortage of new construction

A delay in a vital product can mean a delay in the entire project timeline, whether from waiting for the product or finding an alternative. Labor availability — and costs — have also hamstrung builders and developers. Many of the price changes stem from mitigation of the rising cost of materials, particularly exterior finishes and roofing, electrical components, appliances, insulation, and lumber as noted above.

The single-family home construction process faces the same struggles with building materials, and the NAHB estimates that the market is short by about 1 million units nationwide, due to underbuilding over the last 10 years. High demand for single-family homes contributes to upward pressure on their costs – and when buyers cannot afford or find a single-family home, they turn to the rental market. This exacerbates the existing shortage of rental units, which in turn contributes to rising rents.

3. Demand for luxury

Even as rents are rising at record rates, demand for new apartments remains strong — driven both by the existing shortage of rental housing and a base of “lifestyle” and “discretionary” renters who are willing to pay more for the apartments they want.

By and large, apartment units renting at higher rates are still likely to be occupied by a tenant willing to pay the asking rent. As such, there is no downward pressure on rent growth that flagging demand might otherwise exert. Rent growth in this asset class outpaces the national average at 16.7% YOY, with Miami; Orlando, Florida; and Tampa, Florida, posting YOY Class A rent growth of 25% and above.

At the same time, as mentioned above, the rising cost of single-family homes may narrow the pool of potential home buyers and direct them toward rental housing. This creates demand for rental housing that would otherwise be absorbed by the for-sale market, adding to the existing pressure on the rental sector.

4. New migration patterns

While only 8.4% of Americans changed residences between March 2020 and March 2021, the lifestyle changes brought on by the COVID-19 pandemic, including working from home and a desire for more space, have shifted the geography of housing demand.

The Cape Coral-Fort Meyers, Florida, and Sarasota, Florida, metros experienced the largest increases in net domestic migration between June 2020 and June 2021, according to the U.S. Census Bureau. Over roughly the next year, the southwest Florida coastal region, which includes both Cape Coral-Fort Meyers and Sarasota, experienced the largest rent increase out of all markets covered by Yardi Matrix at 36.9% YOY in March 2022.

Demand for rental housing is also rising in less-populous states and rural communities where costs of living remain low. Montana’s population rose by 1.6% between July 2020 and 2021, one of the highest growth rates in the country, and rents in the state’s population centers, including Missoula and Bozeman, have risen by double-digit percentages since the start of the pandemic.

The suburbs and exurbs of major metropolitan areas have also become migration targets.

5. Rising interest rates

With the Fed tightening its monetary policy, mortgage interest rates are on the rise in 2022.

A higher interest rate on a mortgage for a single-family home may spell the difference between an individual or family buying a home or turning to the rental market. This increases the demand for rental housing. For developers looking to create new rental housing, the price of financing a new development has also risen along with interest rates. This adds another cost obstacle to the complications of supply chain issues and construction and permitting delays.