Tourism-dependent markets and expensive markets have been hit the hardest
From June to July 2020, Apartment List’s National Rent Index ticked up for the first time since March. Despite the 0.1% month-over-month increase, the national index still experienced a cumulative decline of 0.3% since the pandemic began. While this dip may seem modest, it is occurring at a time of year when rent growth is normally at its fastest due to seasonality in the market.
In prior years, rent growth from March to July has ranged from 1.1% to 2.1%, going back to 2014 when Apartment List’s rent estimates begin. Over the entirety of the past year, the company’s national index has increased by just 0.2%. This is by far is by far the lowest year-over-year growth rate in July over any of the past five years.
“The fact that we’re seeing rents decrease at what is normally the peak season for rental activity is reflective of the financial hardship and shifting preferences being imposed by the pandemic,” according to the report.
Two Major Factors Contributing to Market Softness
Apartment List attributes the recent softness in the market to two major factors:
1) The pandemic has dramatically slowed moving activity due to the public health concern surrounding the virus itself. And even where shelter-in-place restrictions have loosened, Americans are still wary of moving. In a recent survey, Apartment List found that 33% of Americans are less likely to move during the remainder of 2020 because of the pandemic, and that these changing plans are most commonly attributed to the belief that it is not currently safe to move.
2) Mounting economic fallout from the pandemic is forcing many Americans to seek out more affordable housing options. Today’s unemployment rate remains at a historic high, and many are struggling to make their monthly housing payments. In the same survey mentioned above, Apartment List found that 21% of Americans are now more likely to move, and that the need to find more affordable housing is the primary motivation.
While the overall decline in the index is still fairly modest and is now showing signs of levelling off, it masks significant variation across markets. Property owners are beginning to respond to these new realities by offering lower prices in order to fill vacancies, and prices are responding much more rapidly in the most heavily impacted parts of the country.
Expensive markets and tourism-driven economies show biggest declines
Of the 100 largest cities for which Apartment List has data, 48 have seen rents fall or hold steady since the start of the pandemic in March.
The cities experiencing the biggest dropoff in rent prices generally fall into two major buckets:
1) Markets where the local economy is heavily dependent on the tourism and service sectors that have been hit hardest by the quarantine economy
2) Expensive markets that were already struggling with sky-high rents prior to the pandemic
The first group is typified by Orlando (-2.1 percent rent decline since March) and Miami (-2.0 percent rent decline). As tourism ground to a halt at the onset of the pandemic, Apartment List predicted these cities would be particularly vulnerable because they have the second and third highest shares of workers facing extreme employment risk.
The second group is typified by San Francisco, San Jose, and New York City. Despite having an outsized share of its workforce employed in the tech industry – where the transition to remote work has largely been a smooth one – rents in San Francisco fell by an additional 1.1% from June to July and have now declined by 3.3% since the start of the pandemic. This seems to be driven by the fact that the median rent in San Francisco is the highest in the country, at $3,001 for a 2-bedroom. Similarly, San Jose and New York City have the second and third most expensive rents in the country and also round out the top three biggest price drops in recent months.
Looking forward, Apartment List said the pandemic’s effect on rent prices will depend heavily on how quickly the economy is able to recover. It now seems as if the recovery will be more drawn out than many had initially hoped, making a protracted uptick in downgrade moves likely, as many households facing financial hardship begin looking for more affordable housing. New household formation may also slow significantly as more Americans move in with family or friends to save on housing costs.
These trends could mean that competition will remain tight for rental units at the middle and lower ends of the market, while luxury vacancies get harder to fill. And, as long-term remote work gains traction, renters may move from expensive downtown markets to more affordable suburbs.
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