Rental Housing’s Key Trends Heading Into 2024

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.

Supply

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.

Mortgage Rates

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 Economy

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.

Insurance

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.

Operational Costs

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.

Interest Rates

As the Federal Reserve has raised interest rates in an effort to combat record inflation, housing providers across the industry have felt the impact of these increases. With many apartment communities operating on variable interest rate loans – which have reset this year – rising interest rates are impacting expenses as much as skyrocketing insurance costs.

Given these collective increases, the industry will likely see more buying activity from individual owners that are well positioned to seek out opportunities in the year ahead, while others wait for a clearer economic outlook and a more positive direction on interest rates.

To help mitigate the impact of cost increases and help keep costs down, owners and operators should take stock of their assets and remain proactive and prepared to adapt to industry changes.

• Actively manage insurance policies to ensure that they are adequate and affordable. Rental property owners should review their policies on a regular basis to confirm that they are covering the right risks at the right level of coverage, as well as budget for claims and fees to have a better claims history when it comes to renewing insurance in later years in order to help keep insurance costs down.

• Consider the resiliency of the asset to be able to weather natural disasters, and consider investing in upgrades such as storm shutters, flood barriers and backup power generation. Making these investments can help reduce the risk of damage to the property and the need for costly repairs in the event of a disaster.

• Review tax assessments for accuracy, and if it is believed that the assessment is too high, file an appeal. 

• Artificial Intelligence (AI) continues to gain traction, allowing operators to automate tasks, freeing up onsite staff to focus on more important tasks. Rental property owners should also consider the best use of their onsite staff with regard to ongoing requests to save money on labor costs.

• Closely monitor the overall regulatory environment, which is likely to remain complex and ever-changing throughout 2024. Regulation comes at a cost, and property managers should stay informed about the latest developments on the policy front – namely around the federalization of landlord-tenant law and expanded interest in rent control at all levels of government.

The Lingering Threat of Recession

With little reprieve from soaring rates and costs anticipated for the months ahead, the chances of a small recession have certainly increased. 

However, factors continue to suggest that the industry may be more resilient to a recession than in the past. The job market is still very promising, and wage growth is outpacing both inflation and rent growth. Additionally, demand for rental housing remains strong – and should continue to be in the year ahead.

While a recession would certainly pose challenges for the rental housing industry, owners and operators can help mitigate the risks by continuing to monitor the market closely, plan ahead and prepare to adapt. It will be increasingly important to prioritize certain strategies such as diversifying portfolios, maintaining properties and proactively managing finances.

Optimism for the Future

In the face of testing realities and market uncertainty, the rental housing industry remains a bright spot in the commercial real estate space. At this point, the long-term fundamentals of the market will ensure that while margins may be squeezed in the near term, rental housing will remain a mainstay of real estate investments.

There is no doubt that challenges await in 2024. However, our industry remains a critical sector of the economy and its long-term stability, and it is well-positioned to meet these challenges and answer to any opportunities that will arise.

Bob Pinnegar is President and CEO of National Apartment Association