The third quarter of each year is historically the busiest for apartment rentals, but demand fell this year, according to RealPage.
It̵[ads1]7;s the first time the rental technology platform has recorded a drop in the third quarter in the 30 years it’s been tracking the metric. Demand fell by more than 82,000 units nationally, according to the report.
This came after a record number of new tenants filled apartments during the first two years of the Covid pandemic. Now, household formation appears to have stalled, with more tenants moving out than moving in.
Apartment vacancies rose 1 percentage point to 4.1%, still very low due to the earlier increase in demand.
“Soft leasing numbers coupled with weak home sales point to low consumer confidence,” said Jay Parsons, head of economics and industry at RealPage. “Inflation and economic uncertainty have a chilling effect on major housing decisions. When people are uncertain, it’s human nature to go into ‘wait and see’ mode.”
As a result of the slowdown in demand, rents, which had already grown at a slower pace at the start of this year compared to last year, in September fell by 0.2% for the first time since December 2020.
Higher rents in general may turn away some potential tenants, but the decline appears to be across all price points.
And current tenants seem to be in a pretty good financial position overall. Household income among new leases increased by 13%, year-on-year, through August, and rent collection also improved, by 95.4%, up from 94.9% the year before.
“If jobs and wages continue to hold as they have and inflation cools somewhat, we should see pent-up rental demand unlock ahead of the spring 2023 leasing season,” Parsons said.
There is still one red flag for investors in apartment stocks, though: Apartment construction is now at a 40-year high. Apartment REITs were already hammered by higher interest rates, and more supply in the face of falling demand is not a good mix.
Completion of approximately 917,000 new units is on track to peak in the second half of next year — most at the higher rental levels.
“Pak rent growth is clearly in the rearview mirror,” said Carl Whitaker, senior director of research and analysis at RealPage. “That’s true from coast to coast. And as the supply of apartments begins to increase, it’s unlikely we’ll see rents accelerate even as demand returns.”