Latest data show that market rents’ growth kept slowing over the past few months and is on the verge of turning negative on a YoY basis in a context where vacancy rate is rising and multifamily units under construction are now higher than at any point since 1970.
According to Apartment List latest report, “The national median rent increased by 0.5 percent month-over-month in May. We are in peak season for the rental market, when rent growth usually ramps up. However, this month’s data shows rent growth stalling, not accelerating.” In addition, “The stagnant rent growth that we’ve seen over the past couple of months indicates that the market cooldown that started in the second half of 2022 is continuing, even if prices are now trending up. This month’s 0.5 percent increase was the second slowest May rent growth of any year in the history of our rent estimates (going back to 2017), ahead of only 2020, when prices fell in May amid the turmoil of the early pandemic. From 2017 to 2019, rents increased by an average of 1.1 percent in May, more than double this month’s increase.” On a YoY basis, the index only grew by 0.9% in May, down from 1.8% in April and the peak of 18.3% in August 2022.
This phenomenon can me mainly explained by the spike of vacancy rate that is likely to continue in the short term. As a matter of fact, the report also underlines “From January through August of last year, our vacancy index was inching up by an average of 11 basis points per month; but from last September through this month, the average increase has been 21 basis points per month. The vacancy rate now sits at 7 percent, which is higher than the average 6.6 percent rate from 2018 to 2019, and nearing the pandemic peak of 7.2 percent reached in July 2020. This easing has shown no signs of slowing, and it’s likely that the vacancy rate will continue to trend even further upward in the months ahead. New apartment construction is recovering from pandemic-related disruptions, and there are now more multifamily units under construction than at any point since 1970.“
Other indexes are pointing to the same results. Latest Redfin report highlights “The median U.S. asking rent rose 0.3% year over year to $1,967 in April. That’s the 11th-consecutive month of slowing growth. It compares with a revised increase of 1.4% one month earlier and a 16% increase one year earlier.” It adds “A rise in new rentals hitting the market coincided with a slowdown in tenant demand, causing rent growth to cool for the 11th-straight month.“
This trend should be followed closely as it could have significant impact on inflation dynamic. As a reminder, the Shelter component accounts for 34.586% of the Consumer Price Index (CPI) basket, with Owners’ equivalent rent of residences (OER) accounting for 25.437%. Given that the CPI’s measure of rents for homeowners has typically lagged other measures of market rents by between nine and 12 months, this component is expected to normalize downward in the coming months adding downward pressure on headline inflation. This development was already flagged by Fed Chair Powell in November 2022.