It is no secret that many aspects of 2023 have been challenging for the rental housing industry. Amid ongoing economic uncertainty – triggered by lingering inflation – the affordability crisis persists, operational costs have skyrocketed, and growing regulations continue to add an extra layer of strain for housing providers.
As the industry heads into 2024, there are a myriad of factors for owners and operators to consider. Let’s take a deeper look at the key trends to keep in mind throughout the coming year.
A Stabilizing Rental Market
After seeing record demand for apartment living and occupancy rates in 2022 – largely resulting from years of underbuilding and a spike in household formation following the COVID-19 pandemic – the rental market broadly stabilized in 2023. Of course, trends continue to vary from market to market, especially in communities where pandemic-era policies persist.
In 2024, economists largely expect the rental market to continue softening. While there are certainly many factors that could impact the market next year, industry leaders should keep an eye on new construction, pressures from the for-sale market and continued economic volatility.
There is a significant pipeline of new rental units under construction across the country, which has and will continue to stabilize and soften rents in markets nationwide. The industry – and policymakers, especially – can’t forget that it has taken decades of underbuilding to create the current shortage of rental housing, so just a year or two of high production levels will not be nearly enough to solve the undersupply crisis.
In fact, the U.S. needs to build a whopping 4.3 million new apartments by 2035 to make up for a current shortage and account for future demand and affordability.
In recent months, however, we have seen a slowing number of permits issued for new construction, suggesting that the uptick the industry experienced this year could be short-lived. Certainly, should this become reality, the increased supply from 2023 will likely be absorbed more quickly and demand could increase even more.
The combination of high interest rates, low housing supply and soaring home prices has made it much more expensive to buy a home, making it near impossible for many first-time homebuyers to enter the market.
Though rent trends vary by market, it is still cheaper to rent, and it has gotten even cheaper since last year. In fact, the average monthly mortgage payment for a new home is more than half the cost of leasing an apartment. This trend will undoubtedly keep the demand for apartment living high for the foreseeable future.
The global economy is facing a number of challenges, including high inflation and rising tensions abroad. This uncertainty is leading to some people delaying their plans to buy a home, which is further increasing demand for rental housing.
The Outlook on Rising Expenses
Rising interest rates, insurance premiums and operational costs had a monumental impact on the industry this year – and while record inflation has cooled – these challenges will likely persist into the new year.
As of June 2023, insurance costs per unit have jumped 33% year-over-year, resulting in 8% of a unit’s operating expenses going toward insurance, roughly double what was seen just five years ago. Rising rates also contribute to the rising cost of living, making it more difficult for people to pay rent. Simply put, the impact of rising rates and costs is affecting everyone.
Similar to the outlook on rent levels, some markets may see some relief in 2024. However, we are seeing insurers respond by pulling out of states like Florida and California due to the frequency and continued likelihood of natural disasters in those regions – with ongoing climate issues only making it worse. Therefore, as we look ahead, the timeline for market relief is not yet clear.
To help illustrate the drastic impact of operational cost increases, NAA recently updated its Dollar of Rent research, which shows that 93 cents of every rent dollar keeps apartments running and directly support the local community through property taxes. This slim margin underscores the challenging financial environment in which the industry operates and highlights the importance of keeping these essential expenses in mind as we contemplate the challenges of housing affordability.
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