A Resilient Rental Market Shows Positive Signs For Next Year

The newest Zillow Rental Market Report is out, and it’s showing ‘‘a softening of the rental market beyond regular seasonality.’’ Apparently, rental demand dipped double below what’s typical for this time of year this October.

But is this alarming? Let’s take a closer look at what’s happening to the rental market because there’s actually some serious potential going into next year. 

The Rental Market Came In Slower Than Usual But Still Growing

First of all, rental growth only slowed down in October, and rents are not falling. Significantly, the report clearly states that nationwide, “rents remained stable,” with an annual growth of 3.3%. It’s not spectacular growth, but if you zoom in on regional growth in several metro areas, things are looking substantially better.

In fact, rents increased in 48 out of the 50 largest metro areas covered by the report. Some recorded robust gains, notably Hartford (+7.2%), Cleveland (+7%), Louisville (+6.4%), Providence (+5.8%), and Cincinnati (+5.7%).

The losses in metro areas that did report falling rents weren’t all that dramatic. And let’s remember that these are month-by-month losses, not yearly losses. On a month-by-month basis, rents fell most substantially in Austin (-1%), Boston (-0.7%), San Antonio (-0.6%), Seattle (-0.6%), and Denver (-0.5%).

These aren’t huge declines in rent. Investors in the Austin area will not be surprised by the trend. Austin’s build-to-rent boom began during the pandemic, with 51,000 building permits issued in 2021 alone. The thing with building new homes is that it takes time, and when a market’s expansion is largely due to a short-lived population boom, well, developers sometimes just miss the boat with demand. This is what happened with Austin, which is now almost synonymous with a pandemic-era boom-and-bust housing market. 

It’s important to stress that this doesn’t make Austin a bad place to invest. The current decline in rents isn’t drastic and is likely more corrective to the huge gains seen in previous years. While the massive wave of migration to Austin is perhaps over for now, this doesn’t mean that no one is moving to the city. Its population is still increasing, and it’s only a matter of time before the very recent local construction slowdown evens out the supply-demand ratio.

A Single-Family and Multifamily Gap

The other unmistakable trend picked up in Zillow’s report is the resurgence of single-family housing when compared to the somewhat sluggish growth observed in the multifamily sector. 

Again, we’re talking comparisons here. Multifamily rents still did well, just not as well as single-family. Multifamily rents rose in 40 out of the 50 metro areas studied, while a near-total 49 out of the 50 metro areas recorded year-over-year gains in the single-family sector. Single-family housing outperformed the multifamily sector, with nearly double the rental growth: 4.3% over 2.3%. This is a substantial difference and great news for investors with single-family properties in their portfolios. 

Interestingly, there is a lot of overlap between metro areas that did well in single- and multifamily sectors. Hartford, Cleveland, Louisville, and Providence were top for substantial rental growth in both segments, with Hartford recording an identical gain of 7.4% in both single-family and multifamily rentals. 

What’s Hartford’s secret? The usual: a strong job market attracting young professionals, combined with years of chronic underbuilding of new homes. Although the Connecticut town is building thousands of new units, it hasn’t yet gotten anywhere close to plugging the demand, so rents are still rising rapidly. Hartford is still among metro areas with the least amount of new construction permits, number eight in the list of top 10 underperforming metros in new construction across the country. 

It’s the same story with Cleveland, where demand for rentals is huge while new construction is still lagging behind. Cleveland also has the added aspect of having relatively few desirable residential areas, so demand is highly concentrated.

Will the same fate befall these metros as did Austin? Maybe, eventually, if they ramp up construction and then people stop moving there quite so much for one reason or another. But this is why reports like Zillow’s are so useful to investors: you have to ride the wave of high demand and high rents while you can. If you are investing in an area that’s actively building a ton of new homes while the incoming population is trending downward, expect that rent growth will eventually fall and factor that into your ROI projections.     

The Takeaway

Investors, especially those focusing on single-family units, will be pleased to learn that the rental market is alive and kicking. With real estate activity likely to pick up even more next year, rents will continue rising in most areas, but especially those with current high demand due to favorable labor market conditions. In fact, the conditions might be ripe for a little bit of a boom!

Investors should watch for areas that got oversaturated with new construction as a response to pandemic-era population booms, as these markets may take a little while to rebalance after another wave of incoming residents boosts demand. For now, it’s wisest to focus on areas that are experiencing an active surge in demand, but that haven’t yet completed a substantial new construction push. These will almost certainly deliver you great returns on single-family investments.