“Turbulent” only begins to describe the journey of rental markets since COVID-19 arrived in 2020. A combination of unprecedented disruptions and a surge in government assistance created an explosive rent boom followed by a sobering reality check. The following chart offers a visual of the recent rent rollercoaster across 24 large US markets.
Historic Rent Growth Across 24 Markets
COVID Boom: Spring 2020-Summer 2022
Let’s break down this chart by first highlighting Spring 2020-Summer 2022… the COVID Boom. The onset of the COVID-19 pandemic brought about significant disruptions in the rental market. Inflation skyrocketed with the influx of money from stimulus checks and PPP loans, and rents began to rise. Residents began fleeing expensive metropolitan areas like New York City and San Francisco in favor of more affordable secondary cities.
With the adoption of long-term work-from-home policies, many saw no need to pay the high rents typically found in bustling city centers. Simultaneously, COVID-19 restrictions, particularly in California, were perceived as excessive. Extended school closures and the shutdown of outdoor parks and beaches prompted parents, among others, to move to markets with fewer limitations.
Spring 2020-Summer 2022 signified the rapid rise in rents across the board. Some markets fared better than others, the following 4 charts break down the best and worst-performing markets of this era.
Spring 2020-Summer 2022 | Markets With Explosive Growth
Sunbelt states such as Austin, Miami, and Phoenix, experienced a surge in population and rapid rent increases, with some markets seeing greater than 20% YoY growth. Interestingly, all these high-performing markets were located in red states, with Boston being the lone exception.
Spring 2020-Summer 2022 | Markets With Above-Average Growth
The top performers may be mostly red states, but this chart shows that blue states benefited from the COVID Boom as well. It's true what they say: a rising tide lifts all boats. Another trend to note is that the cities that experienced the most rent growth already had rent prices on the higher end of the spectrum.
Spring 2020-Summer 2022 | Markets With Average Growth
Weather seems to play a significant role in the rental market dynamics, particularly evident in these four markets that experienced average growth. Note that these markets were already markets with historically cheaper rent.
Spring 2020-Summer 2022 | Markets With Below Average Growth
San Francisco faced a double whammy of factors contributing to negative rent growth: the work-from-home trend and heavy COVID restrictions. Although San Francisco made an impressive bounce upwards, they still haven’t returned to pre-pandemic rent levels.
The Fed Steps In: Fall 2022-Summer 2024
The Federal Reserve's decision to hike interest rates marked the end of the rent boom, ushering in a period of stabilization and, in some cases, decline. Once the Fed raised rates in 2022, a large shift took place. Almost all markets in the Explosive Growth segment began to exhibit negative rent growth. The markets enjoying rent growth are those previously in the Average and Above Average growth segments. Note that none of the original 24 markets qualify to be highlighted as Explosive Growth or Above-Average Growth.
Fall 2022-Summer 2024 | Markets With Average Growth
The markets that remained with upward trending rents were previously in the Average and Above Average growth segments. Miami emerged as the overall winner, continuing its upward trajectory while the other top performers have gone negative.
Fall 2022-Summer 2024 | Markets With Below Average Growth
The incredible rent growth witnessed in the Sunbelt States was not sustainable. Most of these markets have now transitioned into negative territory since Fall 2022.
Final Thoughts
Rents went on a rollercoaster in recent history, in some markets more than others. Miami has emerged as the clear winner post-COVID, with Austin Texas as the runner-up. San Francisco has fared the worst, as rents still sit below pre-COVID levels. With some exceptions, the markets with the biggest rent gains were often located in warmer climates and in red states.
Those who invested in Sunbelt assets before 2020 experienced an incredible run-up and are sitting on astonishing equity gains. But investors who bought in these high-growth markets near the peak (2021-2022) are likely in a world of hurt. Once hot markets like Austin, Orlando, and Atlanta are currently seeing declining rents.
MN and other historically lower-growth markets are perceived today as stable options. As rents decline elsewhere, these markets continue to experience growth. This stability has caught the eye of outside firms, as evidenced by a jump in acquisitions by out-of-state buyers. In the future I anticipate expanding Ridgeview’s portfolio outside of MN, but investing in my own backyard appears to be the winning strategy today.
Market News
Bay Area Rental Prices Decrease
An article published by TheRealDeal in 2023 explains the decline of apartment rents in the Bay Area. The article explains that areas like San Francisco, Berkeley, and Oakland are witnessing the largest year-over-year drop in 27 months. Rents in other parts of the region, including San Jose, Sunnyvale, and Santa Clara, have also seen decreases. Real estate experts attribute this decline to an increase in new housing, providing tenants with more options and landlords with the need to make accommodations to retain tenants. Some landlords are offering discounts to lease renewals, while owners of older properties are renovating to compete with newer units.
TheRealDeal. (2023, September 18th). "Rents across the Bay Area fall by around 4%" https://therealdeal.com/sanfrancisco/2023/09/18/rents-across-the-bay-area-fell-in-august/
Tips & Tricks
Terms:
YoY Growth: Stands for "year-over-year growth". It refers to the percentage change in a specific metric (such as rental income, occupancy rate, or property value) from one year to the next. This metric helps investors and analysts assess the performance and trends of multifamily real estate assets over time.