Demand for shelter skyrocketed in response to the pandemic. With some financial assistance from federal stimulus and a push by lifestyle changes, renters and homeowners alike reviewed their current living situations, and many found a change was in order. The resulting increase in household formations in a short period of time pushed up both for-sale prices and rents.

I sat down with my coworker Kimberly Byrum, Zonda’s managing principal of advisory and multifamily expert, to learn how the for-rent market is performing given the unprecedented backdrop of supply chain and availability challenges and seemingly insatiable demand.

Wolf: Kimberly, when we spoke in 2021, you said the rental market was the hottest you had seen in your 30-year career. Where is it today?

Byrum: The market today can be categorized in two words: no availability. We are in the middle of peak leasing season, which is typically the second and third quarters of the year, and we have the lowest number of vacant units available on record.

Wolf: Wow, so even tighter than last year. How are renters responding?

Byrum: Well, we have the highest renewal rate in history at 58.3% in the first quarter. If you remember back to the early days of the pandemic, people froze during lockdown, and, at that time, we had a record renewal rate of 57.4%. Renewals are even higher today as people weigh the limited available inventory and rising rental rates.

Wolf: So when looking at rental rates, have we seen any sign of them stabilizing yet?

Byrum: Unfortunately for renters, not yet. Consider a baseline of 3% rent growth in a “normal” year. If you evenly distribute that over the year, it comes out to a .33% rent increase per month. In many markets across the country today, rents are increasing to the tune of 1% to 3% per month. Those looking for a place to settle are feeling the rush to lock now for fear that rents will only keep going higher.

Wolf: That sounds very similar to the mortgage rate urgency that we are seeing on the new-home side. How do you view the rent versus own discussion?

Byrum: Mortgage rates play a huge role when running the numbers for rent versus own. For example, in the early days of the pandemic when interest rates were sub-3%, the time it took for it to pay off to own versus rent dropped down to just three to four years. This got to six years when mortgage rates touched 4%, and, in today’s market, it is better to rent if you are going to stay somewhere less than nine years. In short, the rental market has benefited from higher mortgage rates because rents haven’t gone up as fast as mortgage monthly payments have increased.

Wolf: Interesting. In the for-sale side, we are seeing signs that rising mortgage rates are having an impact on demand. One of the places where this has shown up is through builders offering incentives to home shoppers. What are you seeing regarding concessions in the for-rent space?

Byrum: They remain very limited. Pricing power is still robust in rental communities given the limited inventory and shifting rent versus own dynamics we already talked about, so concessions aren’t needed in the market right now.

Wolf: What do you think is driving all of this rental demand?

Byrum: There are many factors driving the rental market, including demographics, increased savings due to the pandemic, growing household formations, a rise in relocations, income growth, and the higher cost of homeownership.

Wolf: That makes sense. It sounds like demand is holding up well. What could change that?

Byrum: Job losses. If job numbers go negative, you will see multifamily development slow as some developers pull back. Jobs are a key number to track because they provide an immediate measure of demand.

Wolf: What about inventory? Can we expect to see more rental product coming online?

Byrum: We are on the right track for stabilization given how many rental units are in the pipeline, but it is going to take time.

Wolf: I think the question everyone wants to know is when will rental affordability get a bit better?

Byrum: Increased inventory will help, but, as I mentioned, that will take time. In a less desirable outcome, better rental affordability could come in a recessionary environment. We need to see a giant pause in demand for affordability to change course.

There is a silver lining though. Many of the South and Southeastern markets still have rental rates in the 80% to 120% of the area median income range, which are defined as market-rate units. As the new inventory comes online, the expected rental rates roughly follow reasonable levels given local incomes.