Alfred Marshall (1842-1924), one of the greatest economists in history, said that asking whether supply or demand determines prices in a market is not especially useful. “We might as well reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper.”
That said, shifts in price, while shaped continuously by the combination of supply and demand, can be driven at certain moments more by one factor than the other. Over the past 3+ years, behavioral and economic shifts shaped by a pandemic and its conclusion have resulted in massive gyrations in residential rental market performance. During the pandemic, many left apartments behind, choosing to huddle in place with relatives back home. Predictably, rents stagnated.
In 2021, the Joint Center for Housing Studies at Harvard University surveyed rental property owners in ten U.S. cities. These cities are diverse in terms of size, income, and industry composition. They are: Akron, OH; Albany, NY; Indianapolis; LA; Minneapolis; Philadelphia; Racine, WI; Rochester, NY; San Jose; and Trenton, NJ. Nearly 3,000 individuals responded.
Among the findings is that the share of landlords who collected 90% or more of their potential rental revenue declined during the pandemic. Specifically, the share of landlords who collected 90% or more of their potential rental revenue dipped 27 percentage points from 2019 to 2020 (89% to 62%).
Moreover, the share of landlords granting rental extensions or forgiving back rent in 2020 increased significantly relative to 2019 (15% to 48% and 3% to 21%). Not coincidentally, 31% of landlords indicated that they deferred property maintenance in 2020 compared to just 5% in 2019.
Challenges facing landlords were especially acute in more densely populated areas. These areas tend to be more expensive and social distancing often more challenging. They also tend to have high concentrations of financial and business services, industries that tend to offer the ability to work remotely. All these factors created centrifugal forces pushing people out of major cities. Additionally, a number of these very large cities encountered severe social unrest in 2020, including Minneapolis, Portland (OR), etc. This may have induced others to leaving urban rental markets behind.
Such factors have shaped the data even during a period of recovering rents. While apartment rents in New York remain the highest in the nation, year-over-year rent increases have slowed in recent months. According to the New York Times, the median rent for a one-bedroom apartment in New York rose 5.3% in July 2023 on a year-over-year basis. In less dense Jersey City across the Hudson River, median rent for similar space rose 23.3% over the same period.
There is at least one other factor to consider – homeownership. The pandemic ushered record lows in mortgage rates. With many households searching for additional space to huddle more easily in place, conduct Zoom meetings in business-looking environments, accommodate returning college students, and fashion home gyms, demand for homeownership skyrocketed. Even as landlords swooned in many instances, the median homes sales price surged nearly 17% in 2021 according to the National Association of Realtors, the fastest pace on record in a data series tracing back to 1999.
The great news for landlords is that the likes of Pfizer and Moderna were able to quickly create vaccinations and that the economy has stormed back since. Unemployment has drifted down to 3.5% and the nation supports approximately four million more jobs than it did when the pandemic commenced. Meanwhile, pandemic era rent freezes have lapsed and the Federal Reserve has dramatically increased borrowing costs, resulting in mortgage rates that have eclipsed the 7% mark. All these phenomena are supporting occupancy and/or rent growth.
National apartment rent growth peaked at 15.3% on a year-ago basis in early 2022 as the pandemic began to fade into history. True, that increase arrived after a period of stagnant rents, but the recovery was enough to trigger a new wave of apartment development.
Supply Side
During the pandemic’s early stages, the supply side of the residential rental market was also in disarray. To the extent that there were developers ready to move forward with projects, times were challenging. Bankers and other financiers were deeply disquieted by an uncertain economic environment, restricting access to development capital in the process. Offices that issue building permits were often shuttered or understaffed, producing backlogs of paperwork and delaying groundbreakings.
After issuing just 350,000 permits for apartment dwellings in April 2020, a 5-year low, the number of permits issued nationally rose steadily. By 2021’s latter half, the number of permits for multifamily housing units peaked at 700,000 during two separate months (August, September 2021). It has since fallen to 466,000 permits as of July 2023, but is still higher than it was prior to the pandemic.
Accordingly, many new apartments are presently being delivered to the marketplace. During the five years preceding the pandemic, the number of apartment deliveries in the U.S. for rent in large-scale apartment buildings averaged about 341,000. In 2921, nearly 423,000 units were delivered. In 2022, the number exceeded 420,000. According to RealPage, “the U.S. apartment market set record highs for demand, occupancy and rent growth in 2022’s 1st quarter – toppling previous multi-decade peaks set just one quarter earlier.”
Looking Ahead
With so much supply hitting the marketplace, rent growth is poised to be soft going forward. Last year, multifamily construction reached a 50-year high nationally according to the rental listing service RentCafe. If the economy slips into recession, that new supply may meet with unfavorable outcomes.
While many economists have recently abandoned their inflation forecasts, there are indications of ongoing economic softening. Several retailers have begun to struggle, including Macy’s, Target, Footlocker, and Home Depot. A Wall Street Journal article from late last year reported that more people are looking for rent free options with either friends or family. According to a survey conducted by the UBS Group, 18% of adults in the U.S. said they had lived rent free with other people at some point during the previous six months. This was a 7-percentage point increase from the previous year, and the highest level since they had started asking that question in 2015.
A relatively recent study from Realtor.com indicates that median rent nationally declined 0.5% in May from a year ago, the first dip since the pandemic altered life and lifestyles in 2020. Not surprisingly, permits issued for multifamily units have been declining in recent months as many apartments remain under construction.