Renters On Track To Have The Upper Hand In 2023

Shifting supply and demand dynamics in 2023 will likely give renter the upper hand as they look to lease new units, tempering rent growth after a historic run-up in prices during the course of the pandemic.

More multifamily units are under construction than at any point since 1980 — but as that record new inventory hits the market in 2023, fewer renters will likely be looking to move. And that imbalance means “renters will be back in the driver’s seat,” according to a new analysis from ApartmentList.

“Looking ahead to next year, we expect that the most notable trend in the rental market will be a shift in bargaining power away from property owners and back to renters,” ApartmentList analysts note. “This shift already appears to be underway, as evidenced by the recent declines in the national median rent. The factors that have driven that dip – namely, cooling demand colliding with rising inventory – are likely to persist into next year.”

ApartmentList analysts say significant price increases are also unlikely, positing that 2023 will most likely be a year of “flat to modest rent growth.” They also predict communities to again offer rent specials and concessions.

If a recession indeed happens next year, rents could decline more meaningfully, but “even then, it’s highly unlikely that we’d see anything close to a return to 2020 rent levels),” according to ApartmentList. “On the other hand, there have been recent signs that inflation is abating while the labor market remains fairly strong. If renter confidence bounces back and demand improves, rent growth could be faster than anticipated.”

As of November, ApartmentList’s national vacancy rate clocked in below pre-pandemic levels at 5.7%. The firm anticipates the rate could hit pre-COVID levels (which were typically between 6 and 7%) by spring, which translates into more options and less competition for units than earlier this year.

That’s especially true as the rising costs of homeownership continue to keep some would-be buyers on the sidelines, experts say.

“Given existing headwinds including rising interest rates, a slowing economy and rising costs for many of the inputs to production, we would anticipate that the supply demand imbalance for housing will continue well into 2023 and beyond,” says Al Otero, Portfolio Manager at Armada ETF Advisors. “Renting continues to be the more affordable option to homeownership in many major regions of the country and we expect this trend to continue  as it is structural in nature with no easy fix for affordability.”

Earlier this month, Yardi revised its year-end multifamily rent and occupancy outlook upward from 6.9% to 7.6% but at the same time lowered its 2023 expectations from 3.7% to 3.5%.  According to RealPage, leasing traffic for new leases was anemic in November, the lowest point in eight years.

“There is very little net new demand for any type of housing right now, despite strong growth in jobs and wages,” said Jay Parsons, RealPage’s Head of Economics and Industry Principals. “We’ve never before seen new-lease apartment demand freeze up during a period of solid job gains like it has this year. We’re on track to end 2022 with the weakest net apartment demand since 2009. Low consumer confidence and weak household formation tells us Americans are in ‘wait and see’ mode.”