Renting isn't always the best choice, but for many people it provides tremendous flexibility, minimal commitment, and the freedom of not having to take care of every detail of your living situation like maintenance, landscaping, parking, etc. The apartment rental market has been brutal for a long time, about two years of price increases that put the squeeze on renters and potential renters. According to CNBC, apartment rental rates increases have been leveling off, and they might actually go negative compared to just one year ago.
Rental rates climbed over 10% in 2022, which is a significant jump. But that doesn't even come close to the average 20%+ increase renters experienced in 2021. If you paid $1,800 a month for a two-bedroom apartment in 2020, that number could have climbed to over $2,200 per month, an annual increase of over $5,000! There was some relief experienced in the fall of 2022 due to decreased demand, but then prices rose again. Believe it or not, that tide might be turning now.
September numbers show rents dropped for the first time since April of 2023. The median rental rate decreased by 2% from August. Okay, so that might not be a colossal drop, but it might signify a trend. Supply is on the rise, and demand is low, which always points to prices dropping. Supply has been affected by the increase in new construction of multi-family housing (residential property that contains more than one housing unit).
After the COVID-19 pandemic, construction of multi-family housing skyrocketed with tens of thousands built over the course of just a couple of years. In Chicago, Illinois multi-family housing permits and new construction were up 53%, through the first six months of 2023. Much of the new construction is now finished, and these units are hitting the rental market, which affects the supply tremendously. Landlords now have to fill those spots, and that new construction is also drawing away tenants from older units. The Midwest and Northeast regions aren't seeing the same relief experienced in other areas, and they continue to see very strong rent increases. Shockingly, New York rent increases were only 1.9% annually largely due to the supply increase.
The numbers for dropping rental rates are only reflected for one month, so that's not quite a trend, and the data isn't sufficient to point to something consistent. The market could continue this way, of course, which would be great news for renters, but it could also be an anomaly. If we see numbers drop in October, that would be another important data point but could also point to a seasonal change, versus a trend. It's important to note that prior to the pandemic, rental rates followed seasonal changes. But the past couple of years have been different.
One other major factor is the direction of the economy. While there were predictions of a recession (Gross Domestic Product Drops by more than 2% and economic activity decreases) for 2023, but we're not there yet. If a recession does occur, then it's possible that rents could continue to decrease. But you have to factor in supply, demand, and overall costs. Back to the supply increase, that multi-family housing supply should remain high through 2024, and that means there's a good chance that rates will go lower through 2025. Our advice would be to keep watching rental rates, as well as the overall state of the economy. If this continues, it might be a good idea to move soon.