It Gets Serious: Biggest US Cities Where Rents Are Plunging

by Wolf Richter, Wolf Street:

Even Seattle rents are under pressure from new construction. But rents are surging in mid-tier markets.

Over the past few years, commercial real estate prices have boomed, and so has multi-family construction, enticed by dropping and desperately low rental vacancy rates that have pushed up rents. But vacancy rates bottomed out in Q2 2016 and have since turned up. In Q3 2017, the rental vacancy rate rose to 7.5%, the Census Bureau reported on Tuesday. While still low, it’s the highest rate in over three years:

Rents have started to respond in the most expensive rental markets.

In San Francisco, the most expensive major rental market in the US, the median asking rent for a one-bedroom apartment inched up 1.2% year-over-year to $3,420 but is down 6.8% from the peak in October 2015. For a two-bedroom, the median asking rent dropped 5.9% year-over-year to $4,500 and is down 10% from the peak.

These are asking rents in multifamily apartment buildings, that Zumperaggregated in its National Rent Report. Single-family houses or condos for rent are not included. And these asking rents do not consider incentives, such as “one month free” or “two months free,” which effectively slash the rent for the first year by another 8% or 17%. The data is based on “over one million active listings,” Zumper explains in its methodology. Importantly, the data also includes asking rents from new construction.

So this is not what renters are currently paying, which in many cities includes rent-controlled units. Rather, it’s a measure of the open market, including new construction units.

And these new units have an impact. In New York City, the median asking rent for a one-bedroom dropped 4.3% year-over-year to $2,870. For two-bedrooms, it dropped 10.7% to $3,100. Measured from the peak in March 2016, asking rents – not including incentives – have plunged respectively 15% and 22%.

After this plunge, New York’s one-bedroom rents are in second place and two-bedroom rents in fourth place behind San Francisco, Los Angeles, and Washington DC – which also says a lot about how expensive DC and LA have become.

In Chicago, the median asking rent for a one-bedroom apartment dropped 15.9% year-over-year to $1,530, and 15.6% to $2,110 for a two-bedroom. Whatever the reasons – from Chicago’s declining population to its fiscal woes – median asking rents have plunged by 25% and 20% respectively from their peaks in late 2015.

Even in Seattle, asking rents are coming under serious pressure, possibly due to new construction units piling on the market as years of crane-counting are producing results. The median asking rent for one-bedroom apartments dropped 1.1% year-over-year and is down 7.7% from the peak in August. Part of the sharp decline since the summer may be due to seasonal patterns. Rents for two-bedrooms still rose 3.7% year-over-year but are down 5.7% from their peak in April!

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