Cooling rent growth demonstrates the impact of new supply

In 2022, building permits were issued for 707 thousand multifamily units, the most since 1985. Permitting activity has since exhibited a sharp pullback, but because of the lengthy timeline for multifamily construction, the surge of projects that got underway two years ago are just now hitting the market. 2023 saw the most new apartments hit the market since 1987, and this year is on track to bring even more units than last.

This influx of new inventory coincides with a rapid cooldown in the pace of rent growth, clearly demonstrating the economic relationship between supply and prices. Following a period of record-setting rent growth in 2021 and 2022, the national median rent has fallen by 0.8 percent over the past 12 months and is down 2.6 percent compared to its August 2022 peak. The impact of new supply on rent growth becomes even more clear when we plot metro-level data, which shows that the markets that have been building most rapidly are also seeing the sharpest dips in rent prices.

Austin, TX presents the clearest example of this trend. From 2021 to 2023, an average of 9.9 multifamily units were permitted for every 1,000 existing residents in the Austin metro, by far the highest rate among the nation’s 50 largest metros. As these new units have gradually reached completion, the median rent in the Austin metro has fallen by 7.3 percent over the past year, which also ranks first among the top 50 metros.

Beyond Austin, a similar dynamic is at play in a range of markets across the Sun Belt. Among the ten metros with the highest rates of multifamily permitting activity in recent years, seven also rank in the top ten for sharpest year-over-year rent declines. Those markets – Austin, Nashville, Raleigh, Jacksonville, Orlando, Phoenix, and San Antonio – are all seeing strong inbound demand, but have managed to keep rent growth at bay by rapidly expanding their housing supplies. That said, over a longer horizon, these markets have still experienced waning affordability. The seven markets listed above have seen rents increase by an average of 21 percent since early 2020, right in line with the national average. And with a pullback in construction already underway, the current slump in rents is likely to be temporary.

At the other end of the spectrum, some of the nation’s fastest rent growth right now is occurring in markets that have seen anemic rates of new construction. The Providence, RI metro permitted the least new multifamily housing among the top 50 metros from 2021 to 2023 (0.3 units per 1,000 residents), and currently ranks second for fastest year-over-year rent growth at +5 percent. A handful of Midwestern markets – Milwaukee, Cleveland, Detroit, and Chicago – also rank in both the bottom ten for new construction and the top ten for fastest rent growth. These historically stagnant markets appear to be drawing new interest due to their relative affordability, but construction has not yet responded.

The recent surge in multifamily construction has offered a bit of modest relief to renters navigating a growing housing affordability crisis, particularly in the Sun Belt markets that are growing the fastest. But with the end of this construction boom already in sight, tighter market conditions are likely to return once the current supply wave breaks.