Apartment dwellers have breathed a sigh of relief as rent increases have slowed in parts of the country after years of steep increases. But the relief appears to be coming to an end.

Several cities in the Northeast and Midwest, such as Kansas City, Missouri, and Washington, D.C., have seen rent increases this year.

While rents for new leases have been nearly flat across the U.S. over the past 12 months, according to most real estate data and the brokerages that track them, the data is heavily distorted by the Sun Belt, where record-high supply has led to negative rent growth in some cities.

Note: The Sun Belt refers to the area from California on the Pacific coast in the west to North Carolina on the Atlantic coast in the east, from the middle reaches of the Mississippi River in the north to the Gulf of Mexico coast in the south.

Change in median monthly rent for new leases in each metropolitan area compared to the same period last year

The most unaffordable home sales market in decades is forcing more renters to renew their leases. Owners of larger apartments say fewer renters than ever are moving out to buy homes because of record home prices, limited inventory and higher mortgage rates.

“Rental demand is definitely rebounding and we have turned the corner,” said Igor Popov, chief economist at Apartment List, a property listings website.

Strong job growth also opens the door for landlords to raise rents. “It gives them pricing power,” said Linda Tsai, real estate equity analyst at Jefferies.

Rising rents complicate the fight against inflation and could make it harder for the Federal Reserve to cut interest rates. Labor Department data showed inflation came in below expectations last month, but the prospect of more apartment owners raising rents could offset falling rents elsewhere.

The data showed that housing inflation, which mainly measures rents that lag behind actual market conditions by several months, remained elevated in May at an annual rate of 5.4%.

"The housing situation is complicated," Fed Chairman Jerome Powell said at a press conference after the rate decision. "The best thing we can do for the housing market is to get inflation down so we can get interest rates down."

While most analysts say the pace of housing price increases should slow further this year, some apartment owners say the worst of the rent declines are over.

“We think we’ve probably seen the biggest negative impact on new lease pricing,” Tim Argo, an executive at Mid-America Apartment Communities, a U.S. real estate investment trust, said on a May earnings call.

The Sun Belt apartment management company, which has been cutting prices on new leases, said first-quarter absorption was the highest in two decades.

A historic oversupply of new apartments has been suppressing rents for more than a year. Vacancy rates for apartments have risen over the past year, and falling demand has forced landlords, especially those with new buildings, to control rent increases.

But now market reports show that in recent months, apartment buildings have not been losing as many residents as they once did, and vacant units are being rented out at a rapid pace.

Sean Breslin, chief operating officer of AvalonBay Communities, said on an earnings call that only 7% of residents at the company’s properties intended to buy a home in the first quarter of this year. That, he said, contrasts with the long-term average of 16% to 17%.

Large landlords are raising renewal rents by about 4% or more based on recent earnings reports. This is in line with recent historical averages and above overall inflation.

Equity Residential, a real estate company focused on wealthier renters in coastal markets, said in late April that it was asking existing tenants to pay rent increases of nearly 7%.

Investment firms eager to cash in are buying up large apartment portfolios again. Blackstone Group recently agreed to pay $10 billion for Apartment Income REIT, which owns properties in high-end coastal markets.

Other investors are focusing more on mid-market housing, undeterred by the glut of construction that has been concentrated primarily at the high end of the market.

“We are not competing directly with new supply,” said Swarup Katuri, managing partner of investment giant Brookfield Property Group.

In May, Brookfield spent more than $1.5 billion to acquire 7,300 apartments in the Sun Belt, mostly in 30-year-old garden apartment buildings, where the average rent is about $1,700.

Brookfield plans to renovate the properties, increase rents and boost cash profits by more than 34% over the next five years, according to a bond offering detailing the business plan.

The difference in monthly rent between a mid-range apartment and a newer luxury apartment is about $570, on average, according to real estate data firm CoStar. Mid-range rents have also risen faster than low-end and high-end rents since 2019, CoStar said.

Although rents have rebounded from the bottom, most analysts do not believe that rents will rise sharply again this year across the country. Commercial real estate brokerage Newmark predicts that rents for new leases across the country will rise 2% in 2024, far lower than the double-digit increases during the pandemic.

Only four metropolitan areas with populations of at least 1 million — Louisville, Kentucky, Hartford, Connecticut, Providence, Rhode Island, and Honolulu — have seen average rent increases of 5% or more on new leases this year, according to Apartment List.

Meanwhile, high supply is expected to continue to put pressure on rents in Sun Belt cities such as Austin, Texas, Phoenix and Nashville, Tennessee, where new lease rents are still falling on average.

Residents of the Northeast aren’t so lucky. Srinivas Jayaswal said rent for his two-bedroom apartment in West Windsor, New Jersey, has risen more than 40% since 2018, to $3,100 starting this month. The latest figures are up 9% from last year.

"I thought things would gradually get better, but it looks like they are not," Jayaswal said.

The article is forwarded from: Jinshi Data