When viewed with a wide lens, it appears that renters across the United States are finally receiving relief, due in part to the largest apartment construction boom in decades. After declining in May for the first time since the U.S. pandemic, the median rent increased only 0.5% year-over-year in June. Some economists anticipate a modest decline in U.S. rentals this year, following a nearly 25% increase over the past four years.
A closer examination reveals, however, that the trend will likely be of little solace to many renters in the United States who have had to devote a larger portion of their income to their monthly payment. In cities such as Cincinnati and Indianapolis, rents continue to rise by at least 5 percent. The majority of new construction is concentrated in a few metropolitan areas, and many of the new units are luxury apartments with rents exceeding $2,000 per month.
The median rent in the United States increased from $1,629 in June 2019 to $2,029 this June, according to rental listings company Rent, which monitors rents in 50 of the largest metropolitan areas in the United States. During the pandemic, the demand for apartments skyrocketed as people who could work remotely sought more space or decided to relocate to another state.
Tenants like Melissa Lombana, a high school teacher living in the city of Miramar in southern Florida, have less disposable income due to the hefty rent increases. Rent now consumes nearly half of Lombana’s monthly income. This places her in a category known as cost-burdened by the U.S. Department of Housing and Urban Development, which refers to households that pay 30 percent or more of their income in rent. The average rent-to-income ratio per household increased to 30% in the past year. In March, the rate was 29.6%.
Developers Accelerate Projects Amidst Pandemic-Era Surge in Rentals
Developers are striving to complete projects authorized during the pandemic-era surge in demand for rentals or stalled due to a shortage of fixtures and building materials. According to the commercial real estate tracker CoStar, nearly 1,100,000 apartments are presently under construction, a level not seen since the 1970s. Increasing apartment supply tends to mitigate rent increases over time and can provide tenants with more housing options.
According to Marcus & Millichap, more than 40 percent of the new rentals to be completed this year will be concentrated in approximately ten metropolitan areas with high job growth, including Austin, Nashville, Denver, Atlanta, and New York. In many regions, the increase in total inventory will scarcely be noticeable.
According to industry experts and economists, this will make it unlikely for the majority of tenants to see a significant rent reduction. Realtor.com reports that the median rent in the New York metropolitan area increased 4.7% year-over-year to $2,899 in June. In the Midwest, rents increased by 5.6% in the metropolitan area of Cincinnati to $1,188 and by 6.8% in the metropolitan area of Indianapolis to $1,350.
The current increase in apartment construction will not be sufficient to resolve the rising cost of renting for many Americans. Rents will continue to rise throughout the remainder of the 2020s because millennials are such a large generation and we’re so far behind on building housing for them, said Daryl Fairweather, chief economist at Redfin. It will require a number of prosperous years of new construction to build sufficient housing for millennials.
Due to the high cost of land, labor, and traversing government approval processes, developers are incentivized to construct luxury apartment complexes. The greater difficulty lies in constructing more workforce housing.
In a recent report, researchers at Harvard University’s Joint Center for Housing Studies wrote that expanding the supply of modestly priced rentals would help alleviate the strain of so many new apartments targeting renters with high incomes, although additional subsidies will be required to make housing affordable to households with the lowest incomes. Despite the overall decline in U.S. rents, Joey Di Girolamo of Pembroke Pines, Florida, is concerned that he will encounter additional significant rent increases in the years to come.