Rental prices have been climbing dramatically year-over-year. According to our recent Rent Report, 95.6 percent of of state-wide markets for one-bedroom apartments have increased over that time. This means it’s becoming increasingly harder for renters to find available units within their budget and desired area. Renters have been forced to compromise on proximity to work, good school districts and amenities all of which impact their quality of life beyond the bottom line.
For the typical renter, the last few years have been maddening and uncertain. And although it may be little consolation, there is a method to the madness. Like many economic problems, it boils down to demand is up and supply is down. According to Google Trends data, apartment searches are peaking at its highest rate in two years, for example. At the same time, hopeful first-time homebuyers have given up the search largely due to pricing issues which is contributing to record occupancy rates.
Let’s take a deeper dive into the factors contributing to high rent prices.
1. A hot housing market is retaining renters
The housing market has boomed over the past two years. Driven by low-interest rates and pandemic-induced migration, people snatched up houses at recorded rates in order to live closer to family, access more open space or find their dream home during quarantine.
This increase in demand drove up prices and made it harder for people to afford a house. In a recent Redfin survey, 32 percent of those surveyed can’t afford to buy a home in the area they want to live. Homes are 34 percent more expensive than before 2020, with only half of the usual inventory available. The median U.S. home sale price was up 17 percent year over year to a record high of $382,713.
An increasingly significant factor in home prices is investor flips. Investor purchases are at an all-time high, chasing higher profits and pushing up selling prices. Investors bought nearly 20 percent of all homes sold in the U.S. at the end of 2021. With a focus on mid-priced homes, investors are raising prices in the most affordable areas.
Even some homeowners who sold have found themselves renters again either by choice or necessity. According to a June 2021 survey, 45 percent of sellers are not buying a new house as their next housing choice. More than a quarter of those sellers cited current home prices as the primary reason, preferring instead to wait out the market.
Rising mortgage rates are also an issue. In the long term, rising rates may help cool the housing market. But in the short term rising rates—which have reached over five percent for the first time in a decade—are pushing homeownership further outside many renters’ grasp.
2. Migration away from cities and back again
Migration is another factor in demand and a key piece putting upward pressure on the housing market. When the pandemic began, people started looking away from big cities to areas with more space that offered greater access to nature.
With remote working on the rise, working away from metropolitan business centers became easier. This causes rents in big metros like San Francisco and New York City to decline due to lower demand while rents rose in the suburbs and in smaller cities
As the pandemic wore on and became more manageable, these lower prices enticed renters to return to big cities. According to the Joint Center for Housing Studies of Harvard University, “the biggest increases in permanent moves during the pandemic were in March 2020 and December 2020 … which represent increases from 12 and 14 percent, respectively.”
This new demand pushed rents back up. Now, rent prices in the big cities are up to, and often exceeding, pre-pandemic levels along with their suburban counterparts. In our February 2022 Rent Report, six of the top 10 cities that saw one-bedroom rent increases had populations of 300,000 or less. Including Gilbert, AZ, which rose 108.5 percent.
3. Supply is low
Apartment vacancy rates are at a 37-year low, dropping to 5.6 percent during the fourth quarter of 2021. With low supply, rent prices have increased 22.2 percent year-over-year for one-bedroom apartments nationally.
According to a new report from the Joint Center for Housing Studies of Harvard University, many lower-income households, primarily Black and Hispanic households, have been significantly affected by low vacancy and increasing rents during the pandemic.
4. Rental prices are adjusting to pre-pandemic growth levels
In 2020, rent prices didn’t shift significantly nationally, peaking at just over 3 percent in July. But after rents bottomed out in February 2021, the last of a handful of months that saw prices decrease year over year, it started a precipitous rise that reached double digits by September and hasn’t let up since.
This combination of stable to decreasing prices followed by a rapid rise meant that year-over-year increases were particularly large in 2021. In other words, a depressed market in 2020 followed by a quickly rising market in 2021 showed significant year-over-year changes that would have been less extreme if the shifts that took place both before and after early 2021 were less acute in either direction.
The assumption held by many experts was that as 2021 switched over to 2022, those extreme year-over-year changes would start to come down as comparisons would now be made to the surging 2021 market. So far, that hasn’t been the case, and rents have continued to climb at similar rates to what we saw in 2021.
When will this extreme growth end? Looking at month-over-month average rent changes point to August 2022. Percent changes in month-over-month prices have been small since August 2021, suggesting that prices may settle into a more predictable growth pattern better in line with historical trends. Of course, this isn’t all good news for renters as the increases they’ve experienced over the last year become permanent. But at least the sticker shock will appear more reasonable at lease renewal.
5. New construction is driving up the price
Developers are building more units on every corner, it seems, but they won’t bring the relief the rental market needs right now. Most of the new units being built are Class A luxury apartments. Unfortunately, these luxury apartments tend to be priced higher, pushing up the average rent level.
As supply chain issues delay projects and inflation continues to rise, developers are even more eager to build quicker and for higher profits on their properties. This also means a significant decrease in the availability of mid-range apartment buildings, leaving a supply gap in the market for mid-to-lower income groups.
The lower-tier properties are seeing more modest increases, but these properties are also seeing the most demand and it may just be a matter of time before those properties start seeing significant rent increases as well.
How to negotiate rent prices with your landlord
For all these reasons, we expect rents will continue to rise in the foreseeable future, meaning there’s no denying this is a landlord’s market. That’s bad for renters and their ability to negotiate, but there are steps renters should take to make the best out of a bad situation that isn’t likely to subside before their lease is up.
Be prepared with research
Do your homework before coming to the negotiating table. Research the local rental market and look for what similar apartments are going for. Look into historical rent increases and compare those percentages to the percentages being offered.
Show the landlord you’re willing to move on price, but those prices should align with historical trends and the local market.
Be flexible with your lease terms
If you can’t agree to a fair monthly price for what you’re getting, try offering landlord-friendly concessions. Longer lease terms, giving up a parking space or flexibility on some maintenance responsibilities can help.
While giving up certain things as a renter isn’t the best, balancing location, an affordable unit and your budget is worth considering.
Look outside your budget — within reason
Competition is less for more expensive apartments. If you can afford an upgrade, you can find better deals at the higher end with more amenities and skip negotiating with your landlord.
