Rents will rise as demand for apartments increases following the building boom

After a construction boom unlike anything seen in 40 years flooded the rental market with shiny new apartments, landlords are finally breathing a sigh of relief.

The glut of vacancies that plagued the industry is starting to fade as more tenants rush to take up leases.

The latest quarter of demand reached levels not seen since 2021, marking a key moment for landlords, according to an analysis by CoStar obtained by the Wall Street Journal.

Over the past two years, 1.2 million new apartments were built, filling up faster than some experts predicted.

With the economy holding steady and home prices very high, landlords may soon be in a prime position to raise rents next year.

By the end of 2024, an additional 672,000 units are expected to be completed, but a serious slowdown in new projects appears on the horizon for 2025 and beyond.

“The worst of the price pressures from new supply are likely behind us,” Eric Bolton, CEO of Mid-America Apartment Communities, said during an October earnings call.

This newfound confidence has also provided a boost to investors, sparking a surge in apartment building sales across the country, particularly in cities like Denver, San Francisco and the Washington, DC suburbs.

Tenants have had it tough in recent years. Rent increases during the pandemic hit hard, especially in the Sunbelt, with cities like Phoenix and Tampa seeing jumps of 20% or more in a single year.

While the rental market has held steady for new rentals recently, those sticking around to renew still faced average rent increases of 3.5%, according to Yardi Matrix.

But not everywhere is on the rise.

Austin, Texas, finds itself at the point of overbuilding. With its vacancy rate at 15%, the highest in the US, landlords are practically begging tenants to sign leases with offers of months of free rent.

“Basically, the worst apartment market in the country right now is Austin,” Matt Rosenthal, managing partner at Eastham Capital, told the Journal.

Meanwhile, other cities are showing resilience.

Lease renewal rates in places like New York City and Los Angeles rose more than 5% this year, fueled by a push to return to the office. Equity Residential noted a recent surge in demand from Amazon workers in Seattle, who are bracing for a strict office attendance policy starting in January.

With potential rent increases on the horizon, housing costs will become an even hotter topic on the political scene.

In the world of home buying, there are still few choices for renters looking to get on the ladder.

Joe Fisher, president of UDR, summed up the current trend, saying, “Maybe the biggest story of this year that we’ve seen [is] of people walking in the front door and then not leaving [out] the back door.”