How Concessions are Eroding Multifamily Rents

Article originally posted on Globe St. on September 13, 2023

Redfin has an interesting look at the current state of multifamily rents. On one hand, they’re still incredibly high in an historical setting. On the other hand, it’s costing them in concessions.

The firm said that the median U.S. asking rent in August was $2,052. The same period in 2022 was the record high, but that was only $2 more. And the asking rent in July 2023 was $2,038.

A month-to-month fixation doesn’t necessarily tell where markets are going and what they’ll support. And medians are just that, a middle point. No way to tell how the distribution looks or how high or low the top or bottom of the distribution goes. Then there is geographic distribution, because markets are never even across the country.

However, that’s the available data, so it offers at least one view, and in it comes a surprise. There is growing new inventory coming onto the markets and, apparently, getting tenants to rent is an increasing challenge, at least in some parts of the country. So, some landlords are turning to concessions to do two things: bring in the renters who might otherwise have been put off by high pricing, and keep the high asking rents on paper, which don’t get reported with the concessions.

Some are raising rates for existing tenants but not for new ones “to bolster returns without scaring off prospective renters.”

“A year ago, you really didn’t see concessions in the market. Fast forward to today, and they are far more common, with landlords offering from one to three months free in an effort to attract new tenants without lowering their asking rents,” said Rent CEO Jon Ziglar in prepared comments. “Higher-end properties are beginning to see pressure in certain markets as a significant portion of new units coming online are in the higher end and luxury segment. We are still seeing a lot of competition for more affordable units due to less new supply, as well as increased pressure on consumer wallets limiting the ability to stretch for that higher level experience.”

Now, multiple sources and studies over the last few months have indicated to that a strong amount of inventory is still to come online, meaning more supply and potential reduction of pricing power on the part of multifamily owners.

Even as asking rents are now high, the pace of growth has significantly shrunk. “In August 2022, for instance, the median asking rent was up 12.3% year over year,” Redfin wrote. “Rent growth has cooled over the past year due to slowing household formation, economic uncertainty, affordability challenges and an increase in rental supply.”

As for geographic differences, “The rental market has cooled quickly in the West and South in part because those markets saw outsized rent increases during the pandemic,” the analysis said. “Rents skyrocketed as people flooded into Sun Belt cities including Phoenix, Miami and Dallas. But once the rental frenzy cooled, rents in those regions had more room to fall. The West has also been disproportionately impacted by layoffs in the tech sector, which may be contributing to its soft rental market.”

In the West, median asking rent was down 1.1% year over year. In the South, it was off by 0.3%. But rents rose 4.6% in the Midwest and 1.2% in the Northeast.