This Chief Economist Thinks Slow Rent Growth May Have Bottomed Out

When inflation in the U.S. reached its high point about two years ago, it was prevalent across nearly all categories—in grocery aisles, at the gas station and, perhaps most noticeably, in monthly rent checks.

Today, as price growth continues to moderate for many goods and services, stubborn housing costs remain a key sticking point for the Fed as they work toward their oft-repeated 2% inflation target before cutting interest rates. As Bloomberg noted recently, “hotter-than-expected readings for [housing inflation]…are a big reason why the central bank is hesitant to cut rates.”

To wit, as measured by the Consumer Price Index, the Fed’s main measuring stick for inflation, shelter prices climbed 0.4% for a third straight month in April. Notably, a key part of the CPI’s shelter index, the so-called “Rent of Primary Residence” index, was once again robust in April, up 5.4% year-over-year.

But from my vantage point as chief economist for RPM Living, the country’s third-largest manager of apartments with more than 226,000 units in 26 states, it’s questionable (at best) whether those data points match the facts on the ground. Even Fed Chairman Powell himself admitted last week [May14] that housing inflation is “a bit of a puzzle.”

So, what is our RPM team actually seeing? Perhaps surprisingly to some, our data shows that new-lease rent growth, after falling year over year for several quarters, may have bottomed out in Q1 of this year and could be primed for improvement in the quarters ahead.

How did we get here? Coming out of the pandemic in 2021-2022, new-lease rent growth exploded thanks largely to widespread eviction moratoriums that constrained the supply of otherwise available units and artificially raised occupancy rates to record highs. But as a result of those forces—as well as the abundance, at the time, of artificially cheap debt—a flood of new apartment developments broke ground across the country. Today, there are roughly 919,000 multifamily units under construction nationwide, a figure that’s slightly down from its 2023 peak but still extremely strong by the standards of the last 50 years.

With such a massive influx of supply, particularly in suburban Sun Belt submarkets, rents are undeniably weak. In fact, according to the highly reliable and up-to-date housing data provider RealPage, rent growth nationally has hovered around 0% for nearly a year now (after peaking above 15% in mid-2022). What’s more: rents are actually down year-over-year in such formerly stalwart markets as Dallas-Fort Worth, Atlanta, Tampa, Charlotte, Orlando, Phoenix and Austin…and at a time when many more units are set to deliver in those markets.

Nevertheless, for apartment owners and investors, the future appears quite bright.

By our reading of the CPI and our own internal data, markets are primed for a slowdown in CPI inflation (led by an acceleration in the slowdown of the shelter component of the index), ironically enough, as actual rents begin to increase.  Said another way, while inflation gauges seem to say rental rates are still quite inflationary, private sector data and the boots on the ground, see the opposite. It appears that by the time the CPI’s shelter index finally gets to saying rents have cooled, true rental markets will be reaccelerating. Our own forecasts show that national annual rent growth is primed for renewed expansion later this year and into the years ahead. What’s more, if the Fed follows its course and only cuts rates when the shelter index finally catches down to other items in the CPI basket, the central bank may well be cutting in an environment where rents are expanding again! This could rekindle the kind of volatility already experienced in the post-pandemic housing environment and it may also accelerate the existing tendency towards a national oversupply of housing.

French philosopher Jean Baudrillard might have called this kind of state of confusion “the hyperreal.” We call it an investment opportunity. But for RPM, it’s not just the chance to deploy capital into a down market, it’s also the mandate to navigate our management clients out of the more recent challenging times and into a bright future market.

Brad Dillman is Chief Economist at RPM Living