After analyzing the largest rental markets, here's where prices could fall by Austin Wolf. Vacancy rates clearly have an impact on rents.
When there are more rental units available in a given market, landlords have to compete to gain tenants, like offering concessions.
But even if a landlord doesn't lower rents outright, offering just one month for free lowers the effective rent for a given unit. So, which markets are currently seeing a decline in effective rents and which are currently experiencing high vacancy?
Hmm?Finally, which markets are likely to see higher vacancy in the future, which could mean future rent declines?Hmm?So here are the 30 markets. I'm not going to list all 30, that would be boring, where rents are declining.
By using rental data from CoStar and only keeping markets with more than 25,000 rental units, we are able to track the cities with the lowest 12-month change in rents.Number one, Fort Myers, Florida.Jumping down to Phoenix, Arizona is on the list.
And also Colorado Springs, just a tick under 1%.There's a lot under 1%, like San Diego, California, East Bay, California, Greenville, South Carolina, Myrtle Beach, South Carolina is actually a little bit up, and Corpus Christi, Texas.
But let's dive into Fort Myers, Florida, Austin, Texas, and Raleigh, North Carolina. They have the highest declines in effective rent.You can drill down to the 30 other markets, too, if you want.Biggerpockets.com slash blog.
And also notice how most of the pandemic boom towns have also seen a decrease like Phoenix, Arizona, Tampa, Florida, Charlotte, North Carolina, Dallas, Texas, Atlanta, Georgia, all declining.So now let's look at vacancy rates.
The top 30 with the highest vacancy rates are related to rent declines, vacancy rates are.
So let's go ahead and take a look at the markets with the highest vacancies and then plot their changes in rent beside them, which you can see perfectly laid out in chart form at biggerpockets.com slash blog.
So just because a city is experiencing high multifamily vacancy, it really doesn't even mean that it's also experiencing a decline in rents.Like Jackson, Mississippi, Oklahoma City, Houston, Texas, all cases in point here.
What do those cities have in common though?They're relatively affordable compared to their pandemic boomtown counterparts.Almost every other city on the list had small rent growth or rent declines.
The top 30 markets with the most rental units under construction.This is interesting.What do the cities with high vacancies and decreased rents have in common?New supplies coming aboard.More rentals complete their construction and come online.
Landlords have a greater competition to place tenants, all that stuff.It's just more competition, which drives rents down.
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So we take a look at the top 30 with the highest percent of new units currently under construction.
And many of the markets were included on all of the stuff we talked about earlier, displaying the cities with the highest rent decline and vacancy rates.So it's no surprise that supply and demand is at fault here.
And it's related to these markets variables. So another thing to note, all the charts that you can find inside this article details new units under construction.That means these new units aren't even on the market yet.
Once they do come online, you're probably gonna see a downward pressure on effective rents, at least in the short term, but not in the long term.I'll cover this in just a bit.
Is there a measurement for how strongly new rental unit construction is related to an increase or decrease in effective rents?It turns out there is.How much does new supply impact future rents?
Okay, in statistics, there's a measurement called the correlation coefficient. This is a measure of the relationship between two variables, like new construction and median rent.Values closer to negative 1 indicate a negative relationship.
If construction rises, median rents go down.Maybe.Values close to 0 indicate no relationship, or little.And values closer to 1 indicate a positive relationship.Over a long period of time, if construction rises, median rents go up.
I've measured the correlation between new construction and median rent for all markets with more than 25k units and leaves smaller markets out of this analysis.
Notice, I can see, when we measure from 2021 onward, there's actually a negative correlation for the top markets.
The lower the correlation, the closer to negative one the values are, the more likely it is that additional new supply will put downward pressure on rents.
So for example, it's highly likely that if metros such as Phoenix, Minneapolis, and Denver continue delivering new supply, their effective median rent is going to go down.Decline as well, right?But how true is this in the long term?
So I went ahead and ran the same analysis, but this time including data all the way from the beginning of the new millennium.So here's the correlation for each market from 2000 to 2024.
Over the past 24 years, additional units under construction actually had a positive relationship with rents, which means if supply goes up over time, median rents are likely to go up as well.
According to all the data, it looks like the top five markets with the strongest supply-to-rent growth relationship are Springfield, Missouri, Asheville, North Carolina, Nashville, Tennessee, Dallas, Texas, Charlotte, North Carolina.Why?
Well, my opinion is that growth of supply indicates investors and builders expect demand to increase for a given market. If supply follows demand, new construction is likely a lagging indicator of city growth.
Cities with a strong long-term relationship between supply growth and rent increases may be excellent places to invest, even if they're experiencing rent declines like right now.What does it mean for real estate investors? Let's get into it.
In the short term, a glut of new supply is going to put downward pressure on rents.It just happens.But if you're considering an investment in these cities, I wouldn't expect growth in rents anytime soon.Fort Myers, Florida, Miami, or Sarasota.
All Florida. The ultra-conservative investor may want to include rent declines in their near-term pro formas.
However, as we saw in all the charts you can see for yourself, an increase in supply is also an optimistic sign that there is more growth expected in the long term for all of these markets.
Please let me know if you disagree with anything that I talked about today.I'd be happy to have a discussion and possibly learn something from your point of view as well, which you can do at biggerpockets.com slash blog.
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