Here’s Why Wealthier Tenants May Be Seeing the Most Declines in Rent

Article originally posted on Globe St. on February 8, 2024

Just the other day, an analysis from Apartment List declared a month of negative rent growth along with the other five that had gone before.

Median rent is down by 3.5% since the peak during the summer of 2023. “The only period that brought a sharper decline was from September 2022 to January 2023, when rents fell by 3.7 percent as the market shifted into the period of sluggishness that still persists,” they said. In the three-year period before the pandemic, average winter rent decline was 1.8%. And much of the driving force is a surplus of new apartment construction and added inventory of living units.

“Tepid rent growth at the start of 2024 may seem counterintuitive considering the resurgence of apartment demand over the past 12 months,” said RealPage Senior Director of Research and Analysis Carl Whitaker in a Wednesday analysis. “But it’s important to remember that supply also increased substantially during that same window. In fact, the volume of new supply outpaced absorption and that trend will likely persist throughout 2024. As such, rent growth should continue to face downward pressure as a result of new apartment deliveries.”

However, these are all of averages, the great distillation of what everyone, one must suppose, experiences at the same time. Except, it almost never works that way. Distributions always abound quietly in the shadows, determining who feels the most of change and who doesn’t.

The Wall Street Journal had an interesting take, that the wealthiest renters are seeing falling rents while everyone else sees them continue to rise. Quoting data from Yardi, they wrote, “Asking rents at properties populated by the highest-earning renters fell by 1% in December,” and that the figure didn’t include additional concessions, like periods of free rent, included in about a third of all rental listings according to Zillow.

What developers were telling GlobeSt.com during the pandemic helps explain the dynamic. Remember that construction costs had raced upward, ultimately adding more than 40% of final delivered costs over pre-pandemic times. Property valuations jumped. To make new deals pencil, units in an apartment building had to promise significant future rent growth. Things got to a point where many developers had to focus on up-scale units. Anything else was a fiscal non-starter.

That meant a bias toward luxury units in much of the heavy construction trends that led to the record inventory delivery levels of 2023 and 2024. The overabundance of higher-end units would lead to a concentration of supply for a limited part of the market, so prices would fall more there.