Renters have experienced a favorable streak in recent years, largely due to a surge in apartment construction that has helped stabilize rents after their pandemic-induced peaks. The past year saw developers complete the highest number of units nationwide since 1974, resulting in a competitive market where landlords are actively lowering rents and providing various incentives to attract tenants. Some industry experts have suggested that 2025 may even be dubbed “the year of the resident.”
However, the construction landscape is shifting. Rising building costs have led to a decline in new construction projects, signaling potential challenges ahead for renters. While a projected 500,000 new apartments are expected to come on the market this year, the pace of construction is slowing. In contrast to recent years, the pipeline for new developments has significantly diminished, a trend that could contribute to a tightening rental inventory altogether—likely pushing rents back up.
The recent years have seen tumultuous demand for apartments, as many individuals sought larger living spaces or transitioned to independent living arrangements. This heightened demand resulted in significant rent increases, with a 20% jump nationally from 2020 to 2022. Nonetheless, the influx of new apartment units over the last couple of years has countered this trend, leading to more stability in rental prices. Rent growth has stayed below 1% for the past 16 months, a stark reduction from the double-digit increases during the peak rental surge of 2022. Incentives from landlords, such as free rent and parking, have become prevalent again, as they attempt to fill vacancies in their properties.
During this dynamic period, it appears that all renters—regardless of income—have benefited from the boom in construction. However, as the effectiveness of these incentives wanes, landlords may find it unnecessary to offer concessions if demand begins to outpace supply once more. The construction industry remains sensitive to economic factors, particularly the Federal Reserve’s interest rate hikes, which have increased the costs of obtaining loans for new developments.
Looking forward, projections suggest that apartment supply growth will experience a drastic decline in the coming years, inevitably impacting the rental market. As of late, apartment construction starts have plummeted to levels not seen since 2013. This trend indicates that we may face a severe shortage of rental units, exacerbated by the aforementioned increase in construction costs and difficulties in financing.
Different regions will experience these shifts unevenly, with many newer apartments primarily concentrated in southern US cities. Coastal markets, where development is already constrained by land and regulatory challenges, may face even tighter rental conditions due to more significant declines in new construction. Consequently, places like New York and San Francisco are projected to have limited new inventory, which could significantly benefit landlords and potentially sour the experience for renters.
There are also potential issues related to project delays in construction, which could lead to a backlog of apartment units that were expected to be available in 2025. Compounding this situation, demand for apartments appears to be rising again, indicated by increases in leasing traffic at the end of 2023, and experts suggest we could see a reawakening in the rental market sooner than expected.
Overall, while renters have benefitted from an oversupply of apartments recently, the trajectory indicates a forthcoming tightening of inventory and rising rents as the market adjusts to the declining pace of construction and increasing demand.
