2022’s Key Rental Market Trends that Will Still Be Trending In 2023

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The prime rate increase in November of 2022 boosted interest rates to the highest level since 2007. The combination of increased interest rates and rising inflation has negatively impacted renters. But promising data shows 2022 key rental market trends will still be trending in 2023.

Hybrid/Remote Workers

Currently, 37% of the U.S. workforce works remotely or has a hybrid position. Because trips to the office are only a few days a week or non-existent, the opportunity to move to more affordable communities is possible. In a recent survey, 44% of these workers stated they would move within the year.

The question is where will these workers move and will they buy or rent?

Household Reorganization

The pandemic saw many young adults move back in with their parents, some bringing their kids with them. Post-pandemic, many households began to reorganize. Many family members and friends moved out of shared family homes into new homes or apartments, increasing the number of households in the U.S.

Then home demand started cooling in Q4 of 2022 due to inflation and increased interest rates. This has caused a reduction in households by 143,000. The impending recession has many potential renters thinking twice about their finances, or lack thereof.

How impactful household reorganization and work-from-home arrangements will be

on the commercial and residential rental markets is only starting to be seen.

Midwest Migration

High rent increases in Sun Belt cities are causing a migration of renters to move to the Midwest, where rents and living costs are more affordable. The graph below shows Sun Belt areas of Jacksonville, Phoenix, and Las Vegas rentals and rent prices barely increasing while Cincinnati, Indianapolis, and Kansas grew at a higher rate in 2022. While 2023 has seen this rental growth slow, its cause may be the slowdown of the overall rental market challenges.

Graph source apartment list.com

Suburban Migration

The migration of remote and hybrid workers to the suburbs brought about a spike in the suburban rental & sales markets. As the population shifts to further locations, rent in these areas increases. By November 2022, rent in the suburbs surrounding the major cities saw a rise of 20.7%, with the farthest suburbs seeing a 27.7% increase. As the population continues to shift to suburbia, rents will continue to increase.

Photo source apartment list.com

Pandemic Pricing Gap Shrinks

Another reason 2022’s key rental market trends will still be trending in 2023 is the shrinking pricing gap between the Sun Belt and Midwest Areas where rents were highest early in the pandemic, like San Francisco and the Sun Belt, which are seeing slower rent increases, even decreases. Places with the lowest rents began to see a fast-rising price increase caused by an influx of new moves.

The graph below shows the gap narrowing in Arizona where the cities of Gilbert and Tucson had the most affordable rent in March of 2020, but by the end of 2022, rent had increased in Gilbert by 36% and in Tucson by 41%. Rents in Scottsdale which were already expensive did not see an increase in this time period.

Rents in states such as California and New York, where there are absorbent rents in some areas and more moderate rents outside of the city limits saw the largest narrowing in the rental gap. While areas, where rent is known to be higher, barely saw an increase.

Photo source apartment list.com

Rental Vacancies Will Continue to Increase in 2023

While key market trends such as pricing growth were profitable for the real estate industry, two trends did start to challenge landlords.

Rent prices surged nationally in the first two quarters of 2022 by 5.5%. As rent growth began to cool, prices began to drop, with the steadiest drop occurring in the last two quarters. Despite seasonal declines, which often occur in the autumn and winter, the declines seen in late 2022 were in addition to these. The decline in rental prices meant less money in the landlord’s pockets.

Unfortunately on the supply side, the number of empty rentals has increased. The number of vacancies in the rental market is slowly returning to its post-pandemic rate of 6% nationally. An increase in vacancies and fewer people looking to rent means less competition for a larger variety of rental spaces.

The feds announced days ago that they will raise the prime interest rate again which will have prospective renters rethinking their housing options. Paired with increasing inflation, there is a possibility the rental market could have an influx of former homeowners who will let their properties go because they can no longer keep up with their mortgages.

Photo source apartment list.com

Despite 2022’s key rental market trends that will still be trending in 2023, several factors could reshape the rental market. The rising cost of living, higher inflation & interest rates, growing unemployment, and a possible recession could drastically affect the rental market in 2023.