In the United States, residential rent prices are up 7.5 percent — three times higher than normal — with no ceiling in sight.
In particular, demand is especially high for single-family homes and apartments in smaller, cheaper cities that have less inventory. Here are a few factors that are driving up rental prices.
A great migration.
During the pandemic, many millennials and Gen-Zers moved back in with their families to save money and reduce the risk of exposure to COVID-19. However, as vaccination rates increase and restrictions lift, these young people are returning to cities in droves.
The rise of remote work.
Many companies, like Facebook, are extending remote and flex work giving employees the freedom to move out of the (often expensive) cities where their offices are located.
As a result, rents are skyrocketing in cities like Boise, Spokane, Tucson, and Las Vegas. San Francisco and Manhattan, on the other hand, are part of a small number of cities where rent is still below pre-pandemic levels. However, that is expected to be short lived.
A lack of rent caps.
Many cities across the country do not have caps on rent increases — mainly because they’ve never needed them before. As a result, landlords are raising rents exponentially. They do this with the confidence that demand is high enough that someone will be willing to rent the apartment at any price.
The hot home buying market.
The home buying market has been buzzing since early last year. And now, rising prices are inspiring two critical trends: Baby boomers are taking advantage of their empty nests and selling their homes while the price is right and, rather than purchasing something new, are pursuing rentals. Also, these prices have made new home ownership now inaccessible for many Americans, leaving them looking for apartments as well. Both of these factors are significantly impacting demand.
Many analysts believe that it is too soon to determine what these trends will ultimately mean. However, it is expected to push up inflation — which recently saw its largest spike since 2008.
I am weary that these high rates are neither sustainable nor good for the real estate industry in the long term. If there is a silver lining, it is that much needed attention is being brought to the lack of affordable housing in many markets.
The availability of more housing could help level out both home buying and rental prices. And, as prices of building materials decrease — the cost of lumber, for example, dropped by more than 40% in June — the current real estate demand could create a prime opportunity for a boom of new construction. After a tough year and a half, this could be an exciting time to be a real estate investor.
Danilo Diazgranados is an investor, collector, and lover of fine wines and a member of the prestigious Confrérie des Chevaliers du Tastevin, a fraternity of Burgundy wine enthusiasts.