Apartment rental price growth is finally slowing

Apartmental rental prices look to have hit their peak following tremendous gains throughout 2021, and experts say this could help to boost some real estate stocks that did well in the early days of the pandemic.

Between June and July, rents rose by just 0.8%, which was only a third of the growth seen over the same period one year earlier, according to data from RealPage. Annually, rents in July were up 12.2%, compared to 13.8% yearly growth in June.

Rents are cooling at a time when apartments are becoming less affordable. The problem is that rent growth has outpaced income growth for the past 20 years. That briefly changed early in the pandemic when landlords slashed rents dramatically in early 2020, at a time when renters were fleeing urban areas. However, as people returned in 2021, rental prices increased once more. These new renters tend to be younger however, with lower incomes, which meant landlords couldn’t increase rents as much as they’d like.

Landlords also offered incentives to get people to return, including free months in their lease or adjusted terms. Last year many landlords removed some of these incentives, making it more difficult to make true rent growth comparisons from 2021 to 2022.

What’s stopping rental prices from going up now is a massive supply of new apartments coming onto the market. RentCafe said it expects 420,000 new apartment units to be completed this year, a fifty-year high in the U.S. A lot of that new inventory is located in New York City and in the Sunbelt region.

Economists say the shift creates an interesting opportunity for apartment REIT investors. REITs soared during the first two years of the pandemic but have recently tailed off due to rising interest rates. In general, REITs are known to offer high yield, meaning they’re generally preferred by investors when interest rates are lower.

However, REITs vary depending on where they are. On the East Coast, it’s likely that rental rates will ease, while on the Sunbelt, which was cheaper to start with and is still seeing strong demand for rentals, rents might still increase.

Alexander Goldfarb of Piper Sandler told CNBC that the Sunbelt never saw the same COVID-related discounts as the pricey coastal markets, as it was there that many people fled to. He sees potential in the region because rent as a percentage of income has seen a boost there.

“Everyone says people are just willing to pay in the city, but what we found is that Sunbelt rents grew faster and rent as a percent of income,” Goldfarb said. “That number normalized between the Sunbelt and the coasts. People in the Sunbelt were willing to pay more. Coasts stagnated.”

Goldfarb claims that he’s still bullish on apartment REITs focused on the Sunbelt, which includes the likes of Camden Property Trust and Mid-America Apartment Communities. Though he’s less optimistic about the prospects of REITs such as AvalonBay, Equity Residential and UDR, which are centered on the coasts.

Meanwhile, data from CoreLogic shows that rents for single-family homes are also softening of late. In June, rents were up 13.4% from the year prior, a slower growth rate than in the prior month.