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Redfin Reports Newly Built Apartments Are Filling Up at the Slowest Pace Since 2020

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Redfin's latest report reveals that newly built apartments in the U.S. are filling up at the slowest pace since the start of 2020. Only 47% of newly constructed apartments completed in Q4 were rented within three months, a drop from 60% a year earlier. The market is seeing a high supply of new apartments, resulting in increased competition among building owners and limiting rent price hikes. The rental vacancy rate has been steady at 6.6% for the past three quarters, marking the highest level since 2021. Median U.S. apartment rents rose 0.8% year over year in May 2024, reaching the highest level since October 2022. However, the affordability crisis remains, with renters needing an income of $66,120 to afford the median-priced apartment—$11,408 more than the typical U.S. renter's earnings. Small apartments have seen the largest rent declines, with new studio rents dropping 20.9%. The press release highlights the importance of sustained housing construction to ease the affordability crisis.

Positive
  • Median U.S. apartment rents rose 0.8% year over year in May 2024.
  • Rent for new three-plus-bedroom units rose 9.1%, indicating high demand.
Negative
  • Only 47% of newly constructed apartments were rented within three months in Q4, down from 60% a year earlier.
  • Rental vacancy rate remains high at 6.6%, the highest since 2021.
  • Median asking rent for newly built studio apartments fell 20.9% year over year.
  • Renters need an income of $66,120 to afford the median-priced apartment—$11,408 more than what the typical U.S. renter earns.

Redfin's report highlights a significant trend in the real estate market that has considerable implications for investors and stakeholders. The lower absorption rate of newly constructed apartments, standing at 47% compared to 60% the previous year, signals an over-supply in the market. This is important for investors to note as it can influence rental income and property values.

One important takeaway is the impact on rental prices. With the increased supply, building owners are facing more competition, limiting their ability to raise rents. This phenomenon is evident as the median U.S. apartment asking rent increased only modestly by 0.8% year-over-year. Investors should be aware that although rent prices remain high, their growth potential is being constrained, which could affect the yields on rental property investments.

Additionally, the report indicates a significant drop in the median asking rent for newly built studio and one-bedroom apartments by 20.9% and 11.9% respectively. This suggests that smaller units are oversupplied, which may lead to longer vacancies and potential for rental income volatility. Investors with portfolios skewed towards these types of properties should consider these factors when projecting future returns.

Conversely, the median asking rent for larger units (three-plus bedrooms) has risen by 9.1%, suggesting demand remains strong for more spacious accommodations. This offers an opportunity for investors to diversify or focus on larger units to potentially secure higher, more stable rental income.

The housing market dynamics outlined in Redfin's report provide valuable insights into current supply and demand trends. The surplus of newly constructed apartments is a critical piece of information, reflecting the market's adjustment from the pandemic-induced construction surge. The data shows that multifamily building starts have now fallen below their 10-year average, yet completions remain high due to projects initiated during the pandemic. This creates a temporary glut in the market, which is important for potential investors to consider.

The regional variations in rental affordability mentioned suggest that the market conditions can vary significantly based on location. Investors should conduct thorough market research to identify areas with newer apartment supplies where they may have leverage in negotiating rents. Conversely, areas with limited new construction may not offer such flexibility but could present more stable investment opportunities due to less competitive pricing pressures.

Moreover, the report highlights a broader market trend where the construction of smaller units is outpacing the demand for them. The significant rent declines for studios and one-bedroom apartments underscore this. Investors should evaluate their property development strategies, possibly shifting focus towards larger units or markets with higher demand for smaller living spaces.

There are more new apartments hitting the market than normal. As a result, building owners are competing with one another for tenants, which is limiting how much they can boost prices.

SEATTLE--(BUSINESS WIRE)-- (NASDAQ: RDFN) — Less than half (47%) of newly constructed apartments that were completed in the fourth quarter were rented within three months, according to a new report from Redfin (redfin.com), the technology-powered real estate brokerage. That’s down from 60% a year earlier and is the lowest seasonally-adjusted share on record aside from the first quarter of 2020, when the onset of the pandemic brought the housing market to a halt.

New apartments are taking longer to rent out because there are a lot of them hitting the market, meaning building owners are competing with one another for tenants. There were 90,260 new apartments completed in the fourth quarter—the second highest number in records dating back to 2012 (the highest was the second quarter of 2023).

For the past three quarters, the rental vacancy rate has hovered at 6.6%. That’s the highest level since 2021, though it’s worth noting that the vacancy rate is no longer growing like it was during the pandemic.

Apartment builders have pumped the brakes on the number of projects they’re starting—multifamily building starts have fallen below their 10-year historical average—but completions are still near their record high because there were so many construction projects kicked off during the pandemic moving frenzy that are just now being finished.

This backlog of new units is putting a lid on how much rent prices can grow. But at the same time, demand from renters who can’t afford to buy their own homes is keeping rents near their record high.

The median U.S. apartment asking rent rose 0.8% year over year in May 2024 to the highest level since October 2022, a separate Redfin report found. Renters today must earn $66,120 to afford the median priced apartment—$11,408 more than we estimate the typical U.S renter earns. But rental affordability does vary greatly from market to market.

“If you’re looking for a rental and you’ve noticed a lot of new apartments popping up in your neighborhood, it may mean you have room to negotiate on price or ask for concessions like discounted parking or a free month’s rent,” said Redfin Senior Economist Sheharyar Bokhari. “But if you live in an area where the supply of new apartments is limited, deals may be harder to come by. Building more housing is a tried and true way to ease the housing affordability crisis, and with rent and home prices at historic highs, local and federal leaders should continue to encourage more construction.”

Small Newly Built Apartments Have Seen the Largest Rent Declines Because Supply Has Surged

Note: This section covers median asking rents in the first quarter of 2024 for apartments that were completed in the fourth quarter of 2023.

The median asking rent for newly built studio apartments fell 20.9% year over year in the first quarter—the most recent period for which we have asking rent data broken down by number of bedrooms. Meanwhile, new one-bedroom apartments saw a 11.9% decline, and new two-bedroom apartments saw a 1.2% drop. But the median asking rent for new three-plus-bedroom units rose 9.1%—indicating that they’re a relatively hot commodity.

The supply of small apartments in America has been growing quickly, which is likely why this segment of the market has faced the steepest rent declines. The number of studio apartments completed in the fourth quarter was up 32.6% from a year earlier, compared with a 22.2% increase for one-bedroom apartments, a 2.3% increase for two-bedroom apartments and a 0.9% decrease for three-plus-bedroom apartments. Apartment construction in America tends to skew towards single people, with many builders deterred from focusing on families.

To view the full report, including methodology and charts, please visit: https://www.redfin.com/news/apartments-rented-slowest-pace-since-2020

About Redfin

Redfin (www.redfin.com) is a technology-powered real estate company. We help people find a place to live with brokerage, rentals, lending, title insurance, and renovations services. We run the country's #1 real estate brokerage site. Our customers can save thousands in fees while working with a top agent. Our home-buying customers see homes first with on-demand tours, and our lending and title services help them close quickly. Customers selling a home can have our renovations crew fix it up to sell for top dollar. Our rentals business empowers millions nationwide to find apartments and houses for rent. Since launching in 2006, we've saved customers more than $1.6 billion in commissions. We serve more than 100 markets across the U.S. and Canada and employ over 4,000 people.

Redfin’s subsidiaries and affiliated brands include: Bay Equity Home Loans®, Rent.™, Apartment Guide®, Title Forward® and WalkScore®.

For more information or to contact a local Redfin real estate agent, visit www.redfin.com. To learn about housing market trends and download data, visit the Redfin Data Center. To be added to Redfin's press release distribution list, email press@redfin.com. To view Redfin's press center, click here.

Contact Redfin

Redfin Journalist Services:

Kenneth Applewhaite

press@redfin.com

Source: Redfin

FAQ

What is the rental occupancy rate for newly built apartments reported by Redfin?

Redfin reports that only 47% of newly built apartments completed in Q4 were rented within three months.

How has the rental vacancy rate changed according to Redfin's latest report?

The rental vacancy rate has remained at 6.6% for the past three quarters, the highest level since 2021.

How have rents for newly built apartments changed according to Redfin?

Median asking rent for newly built studio apartments fell 20.9% year over year, while rents for new three-plus-bedroom units rose 9.1%.

What income is required to afford the median-priced apartment according to Redfin?

Renters need an income of $66,120 to afford the median-priced apartment, which is $11,408 more than the typical U.S. renter earns.

What was the year-over-year rent increase for U.S. apartments in May 2024?

The median U.S. apartment rent increased by 0.8% year over year in May 2024.

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