The Northeast and Midwest are experiencing the highest rent growth in the country. This is due to a supply and demand balance that favors owners. The five areas showing the best rent growth are: New York City +5.4%, New Jersey +3.8%, Columbus, Ohio +3.6%, Kansas City, MO +3.3% and Chicago, IL +3.1%. Of the five high growth areas, only Columbus has seen a large amount of new construction. The lack of new supply has pushed rents higher. Columbus, on the other hand, is enjoying a tremendous amount of new development and jobs, so demand is continuing to push rents higher.

The other key factor to support rent growth is affordability. In NYC, despite the average rent in Manhattan of $4,800 per month, when compared to income levels, the rent-to-income ratio is relatively low. Kansas City rents average $1,165 per month. which is 7% lower than the national average. KC has a median income of $78K, so there is room for rent growth. The demand for apartments is obviously impacted by affordability, and in these five areas, affordability is not limiting demand.

The flip side to this story is Austin, TX, Charlotte, SC and Miami, FL, where new construction is taking a heavy toll on rents. In Austin, rents are down 6.2% due to overbuilding and there is no end in sight for this problem. There are currently 65K apartments under construction and scheduled for delivery in the next two years, and this will increase the apartments in the city by 22%. Based on current absorption rates, it will take many years to fill these new apartments. Charlotte (37K new apartments under construction), Miami (28K units), Salt Lake City (21K units) and Raleigh Durham (30K apartments) are all set to increase apartment stock by 17% over the next few years. These cities are in a similar situation to Austin and will have to wait for demand to catch up to the current oversupply to favor rent increases.

Projected supply and demand factors in an area are a very accurate indicator of where rents and occupancy levels are headed. There are some cities that will continue to suffer rent and occupancy pressures for the next couple of years due to an imbalance that will take time to correct. We have already seen that construction starts are falling as a result of the overbuilding, so eventually, in areas where population continues to grow, absorption of available units will swing back in the favor of landlords. Forecasted rents in many areas that are flat to down will begin to climb by mid 2025. When evaluating investing in an area, it is critical to understand the pipeline of new construction and population growth to determine which direction pricing pressure will trend and make sure this is reflected in the underwriting.