What’s Behind Apartment Rents' Meteoric Rise And Will It Last

A rise in household formation and the prohibitively high cost of homeownership in many US metros has pushed apartment rents up 11% in the first half of the year, according to a new report from Apartment List. The increase is more than double the rate of inflation and triples the rent growth the firm measured in the years leading up to the pandemic.

Rents have rebounded to pre-pandemic prices in 87 of the largest 100 US cities, and are up 30% since March in cities like Boise, Bend, Ore., and Spokane. That growth is being partially driven by household formation, which is at a historic peak, and major disruptions in apartment construction starts (which have in turn led to record lows in builder confidence). And in many US metros, the supply of available homes to purchase, combined with sky-high prices, are putting homeownership out of reach for many renters. Home inventory dropped by 48% year-over-year in March 2021, while the Case-Shiller home price index is up nearly 8% through May of this year.

“As supply shrinks and prices soar, more and more relatively high-income households are unable to find for-sale housing that meets their needs and preferences. These households therefore remain in the rental market, where they put additional pressure on affordability,” the Apartment List report states. “Post-pandemic apartment hunters are searching with higher incomes and higher budgets, especially when moving to a new part of the country. These are the renters who, if not for prohibitively high prices, might otherwise buy homes and take some pressure off the rental market.” 

What’s more, it appears that more renters are searching for new pads: this summer, search volume among apartment hunters clocked in at 10% higher than in previous summers. And those renters are increasingly “higher-urgency,” meaning they’re looking for leases that start within 30 days of their search.

“This urgency could be a result of several factors, including the expiration of year-long leases signed during the pandemic, moving back towards job centers now that offices and in-person activities are reopening, or moving away from job centers to take advantage of long-term flexible work arrangements,” the report states. “Whatever the reason, a larger and more-urgent pool of renters means a more-competitive market that drives up prices.”

And finally, vacancy rates are at historic lows. While rents are up 11% this year so far, vacancies have decreased by 36%. But Apartment List analysts also suggest the rapid rent growth the sector has experienced this summer may be waning. Online search volume is slowing heading into fall, and vacancy rates appear to be hitting bottom.

But “a brief cooling period this winter is unlikely to reverse much of the dramatic price gains we are witnessing this summer,” the report notes. “Prices going into 2022 will assuredly be higher than they were going into 2021.”