Some tenants might benefit from a massive surge in apartment construction, though not all will see relief

From a broad perspective, it seems as though tenants across America may finally be experiencing some reprieve, largely due to the most significant rise in apartment construction seen in decades.

June saw a marginal 0.5% increase in median rent compared to the previous year, following a decrease in May – the first since the pandemic struck the U.S. Some economists predict that this year, U.S. rents may see a small drop following a 25% rise over the past four years.

However, a more detailed examination reveals that many American renters, having to dedicate a growing portion of their earnings to rent, will find little solace in this trend. Residents of cities like Cincinnati and Indianapolis are still being hit with rent increases of 5% or more. The majority of this new construction is concentrated in a few metropolitan areas, and a large proportion of these new apartments are luxury units, renting for significantly more than $2,000.

The median U.S. rent escalated to $2,029 this June, up from $1,629 in June 2019, as reported by the rental listings company Rent, which monitors rents in 50 of the biggest U.S. metropolitan regions. The demand for apartments soared during the pandemic as remote workers sought more space or chose to move to different parts of the country.

The significant rent hikes have left renters like Melissa Lombana, a high school teacher in South Florida’s Miramar, with decreasing disposable income.

Her one-bedroom apartment rent increased by 13% last year to $1,700 and it rose another 6% to $1,800 this month when she renewed her lease.

“Even $1,700 was hard for me,” expressed Lombana, 43, who supplements her teaching income with a side job in educational testing. “In a year, I won’t be able to afford living here at all.”

Rent now consumes nearly half of Lombana’s monthly income, classifying her as “cost-burdened” according to the U.S. Department of Housing and Urban Development – a term for households spending 30% or more of their income on rent. The average rent-to-income ratio per household last year rose to 30%, and in March, it stood at 29.6%.

Lombana has been unsuccessful in finding a more affordable apartment. Although South Florida is among the metropolitan regions seeing a rise in apartment construction, the units are mostly high-end and therefore unaffordable.

This situation is being replicated nationwide. Developers are racing to finalize projects greenlit during the pandemic or delayed due to shortages of fixtures and building materials. Nearly 1.1 million apartments are presently under construction, as per the commercial real estate tracker CoStar – a level unseen since the 1970s.

Increasing apartment supply generally tempers rent hikes over time, providing tenants with more living options. However, more than 40% of new rentals due this year are concentrated in approximately 10 metropolitan areas, including Austin, Nashville, Denver, Atlanta, and New York, as reported by Marcus & Millichap. In many regions, the increase in total inventory will barely be noticeable.

Even in metropolitan areas experiencing a noticeable uptick in available apartments, such as Nashville, most of the new supply will be luxury units with national average rents of $2,270. Around 70% of the new rental inventory will be luxury, according to Jay Lybik, national director of multifamily analytics at CoStar.

This means that most tenants are unlikely to experience a rent reduction large enough to make a substantial difference, as per industry experts and economists.

“I think we’re in a period of rent stabilization for 12 or 18 months, but it’s certainly not a significant rent decrease,” stated Hessam Nadji, CEO of the commercial real estate firm Marcus & Millichap.

“We’re constructing a record number of units, unseen in many decades,” Nadji added. “It’s going to cause some slackening and pockets of overbuilding, but it’s not going to fundamentally solve the housing shortage or the affordability problem for renters across the U.S.”

The rent surge has made it difficult for workers to keep up with inflation, despite robust wage growth in recent years, exacerbating a long-standing trend. Between 1999 and 2022, U.S. rents soared 135%, while income rose only 77%, according to Moody’s Analytics.

Realtor.com anticipates that rents will decrease by an average of 0.9% this year. However, rents are still climbing in many markets across the country, particularly in areas with strong employment growth.

In the New York metropolitan area, the median rent climbed 4.7% in June from the previous year to $2,899, as per Realtor.com. In the Midwest, rents jumped 5.6% in the Cincinnati metro area to $1,188, and 6.9% to $1,350 in the Indianapolis metro area.

The current surge in apartment construction isn’t sufficient to address the rising cost of renting for many Americans.

“Rents will continue to grow for the remainder of the 2020s because millennials are such a large generation and we’re severely lacking in housing construction for that generation,” said Daryl Fairweather, chief economist at Redfin. “Many strong years of new construction will be needed to provide adequate housing for millennials.”

The bigger challenge is creating more workforce housing. The cost of land, labor, and navigating governmental approval processes incentivizes developers to construct luxury apartment buildings.

Expanding the supply of reasonably priced rentals could help alleviate the strain caused by the influx of new apartments targeting renters with high incomes, “although additional subsidies will be required to make housing affordable to households with the lowest incomes,” Harvard University’s Joint Center for Housing Studies researchers noted in a recent report.

Despite the overall decrease in U.S. rents, Joey Di Girolamo, from Pembroke Pines, Florida, fears he’ll face more steep rent increases in the coming years.

Last year, the web designer left a two-bedroom, two-bathroom townhome he rented for $2,200 a month to avoid a $600 a month increase. This year, his rent went up by $200, almost a 10% increase.

“That blew me away,” Di Girolamo, 50, expressed. “I’m just dreading what it’s going to be like next year, but especially 3 or 4 years from now.”

Frequently Asked Questions (FAQs) about U.S. rental market

More about U.S. rental market

• U.S. Department of Housing and Urban Development
• CoStar commercial real estate tracker
• Marcus & Millichap commercial real estate
• Moody’s Analytics economic data
• Realtor.com rental reports
• Harvard University’s Joint Center for Housing Studies
• Redfin market analysis