Rental landlords may have to brace for impact.
The pressure will come during the second half of this year and into the next as more rental supply hits the market, reaching the highest level since the 1980s, according to RealPage.
“We're going to deliver more supply than what we can realistically absorb,” Carl Whitaker, director of research and analysis at RealPage told Yahoo Finance.
Rent prices have fallen the most in three years in May as the number of rentals grows, tipping the rental market scale in favor of tenants. The median asking rent dropped to $1,995 in May, down 0.6% from a year ago, Redfin reported, the steepest annual decrease since March 2020.
Redfin noted the amount of completed units available grew 24.2% in April from a year ago. Separately, RealPage found that more than 500,000 are scheduled to be finished in the next two years. Most of those new buildings are mainly Class A apartments, Whitaker said.
“We're delivering all this new housing, which means more options for renters,”Whitaker added."The challenge, though, is that the new supply that delivers just inherently tends to be at the very top of the price spectrum.”
One homebuilder, Lennar (LEN) raised a red flag Thursday about the surge of new apartments in the rental market. The company expects a loss of about $10 million from its multifamily business unit in the third quarter. That follows an operating loss of $8 million in the second quarter and a loss of $22 million in the first quarter.
“We see that there is general downward pressure on rents as many markets have become somewhat overbuilt, and there is additional inventory being completed and coming online,” Stuart Miller, executive chairman at Lennar on the earnings call with analysts Thursday.
Miami-based Lennar said in December it would hold off its plans to spin off its multifamily division, called Quarterra, due to market uncertainties. The challenges Lennar is up against are similar to what rental property owners are facing across the country as more apartments create a headwind for the market.
“While rents won't likely drop significantly, they are not likely to grow very much either, and remember that rentals and rent equivalents make up a significant part of the CPI calculation," Miller said.
The Bureau of Labor Statistics reported Tuesday that rental prices were by far the “largest contributor” to inflation in May. The overall shelter costs were up 8% from a year ago, according to the government's Consumer Price Index report, which showed that consumer prices rose at the slowest pace since April 2021.
Meanwhile, nationwide, asking rents on new leases were up 1.4% from the prior month, Redfin found. Other data shows that renter retention is stabilizing, about 52.3% of apartment renters with expiring leases signed renewals, up 2% from pre-pandemic levels, according to RealPage.
Still, Federal Reserve Chair Jerome Powell on Wednesday wants to see more progress on bringing down rental prices.
“We do need to see rents bottom out here or at least stay quite low in terms of their increases because we want inflation to come down and rental is a very large part of the CPI, about a third, and it’s about half of that for the PCE,” Powell said.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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