Rent Prices Are “Guaranteed” to Increase Over the Next Two Years—Here’s Why

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For landlords feeling the pinch of high interest rates or would-be investors wondering how they can cash flow, there’s some good news: Rents will continue to rise. However, for rent-burdened tenants, the outlook is not so rosy.

“We’re gonna build 600,000 apartments this year,” Barry Sternlicht, CEO of Starwood Capital, an investment firm specializing in hotels and market-rate multifamily housing, said recently on CNBC about America’s construction of apartments, “and 400,000 the year after and 230,000 the year after that.”

Why is he so bullish on housing?

“This is my problem with [Jerome] Powell,” Sternlicht said regarding the Federal Reserve chairman. “His policy has crushed housing. With only 220,000 houses coming in 2026, I guarantee you, rents will go up in 2026.”

The high interest rates Sternlicht refers to, instigated by the Fed, have kept homeowners rate-locked and thus created a stagnant real estate market with little inventory and rising home prices. According to a recent Bankrate study, the average annual cost of owning and maintaining a single-family home in the U.S. is more than $18,000 a year, 26% higher than four years ago. This number doesn’t include mortgage payments but hidden costs such as closing costs, insurance (rates have been soaring), maintenance, energy, internet, cable bills, and adjusted figures for property taxes.

Nationally, that amounts to $1,510 monthly on top of a mortgage payment. According to Zillow, the average U.S. rental price is currently $2,208 for a single-family home. Thus, it is undoubtedly cheaper to rent an apartment than a home and will continue to be so for the foreseeable future, even when interest rates come down. 

Given this, the demand for apartments is at an all-time high. However, the lack of inventory due to interest rates—as Sternlicht states—adds even more need for apartments.

Rents Are Rising Faster Than Wages 

Recent data backs Sternlicht’s remarks. According to a recent analysis from online brokerages Zillow and StreetEasy, rents jumped 30.4% nationwide between 2019 and 2023, while wages during that same period rose 20.2%. Much of this disparity between wages and rents occurred in large Sunbelt cities like Atlanta, Charlotte, Miami, Phoenix, and Tampa. 

Although some metros, such as Austin, Texas, and Portland, Oregon, have seen some rental decreases as more apartments have come on the market, for highly populated cities like New York, there has been an insatiable demand for accommodation, sending rents to unprecedented levels. 

“In New York City, construction just can’t keep up with demand,” StreetEasy senior economist Kenny Lee said in the report.

More Forever Renters

With hundreds of thousands of rental units going up in Sunbelt markets to account for a shifting job and population market, tenants have a better chance of cutting deals than elsewhere. Yardi Matrix, a data and research firm for commercial real estate, expects 1.3 million units to be completed in 2024 and 2025 while bottoming out in 2026, reaching levels not seen since the 1970s. 

Many of these rentals are amenity-filled and in luxury buildings, populated by high-earning tenants who want the flexibility of moving at short notice and not being hitched to a mortgage. They have upturned the idea of owning a home, once the dream for aspiring high-earning Americans.

“The biggest part of this story is really that the millennial generation has come of an age and an income level, where in previous generations they would have been moving to the suburbs and buying houses, and they’re not,” Philadelphia developer and Post Brothers CEO Michael Pestronk told Fox’s KTVU.

Deep Rental Discounts for Luxury Apartments

The rental increase Sternlicht talks about isn’t uniform across all rental sectors. Where most landlords operate—the sweet spot of average-priced rents—will undoubtedly increase. 

However, rents have decreased for luxury rentals in amenity-filled apartments or sprawling single-family homes. According to a report published earlier this year by Harvard University’s Joint Center for Housing Studies and quoted in the Wall Street Journal, the share of American renters who spend at least 30% of their income on rent has been rising over the past two decades. It is now half of the renter population. 

However, rents in upscale homes in Austin, for example, have plummeted. “Everyone came here to build,” Austin agent Carly Guimaraes said. “Now that supply is coming to fruition, and it’s created a surplus in the luxury market.” 

The result has been landlords offering unprecedented discounts for tenants, such as two months of free rent in upscale Sunbelt rentals. 

The Takeaway for Smaller Investors

So, what can a smaller investor do with this information? Here are some points to consider.

Look to the suburbs

In affluent Sunbelt markets, competing with modern apartment buildings and their cadre of amenities is extremely difficult. However, tenants pay a premium for these places, and smaller apartment buildings or single-family homes could attract tenants by remaining under their price point. 

Most U.S. rental units are owned by mom-and-pop investors with a few properties. According to huduser.gov, as of August 2022, single-family rental properties within small investor portfolios accounted for 80% of investor-owned homes nationwide. That means there remains a high demand for rentals in quiet suburban neighborhoods without high-end apartment buildings, where average wage earners and middle-class families live.

The Midwest offers opportunities

The lack of buildable space also affects rental demand elsewhere, away from the Sunbelt, in and around cities.

As Michael Pestronk explained to Fox KTVU, “The biggest issue, especially in large established metro areas, is a lack of product. There’s no such thing as a starter home in large [Metropolitan Statistical Areas] anymore. There’s no land available to build housing within commutable distances of jobs.” 

Buying slightly outside commutable distances of a large city, where prices are lower, but tenants can still earn high salaries, will always be a good move for smaller landlords. According to rentcafe.com, some of the hottest rental markets in the U.S. remain in the suburban Midwest, such as suburban Chicago, including sought-after places such as Naperville, Crystal Lake, Joliet, Schaumburg, and Elgin in Illinois—along with Hammond, Munster, and Gary in Indiana.

College towns remain a good bet

College accommodation has never been more in demand. A prime example is Fayetteville, Arkansas, where the University of Arkansas broke its enrollment record for the third year in a row, with over 32,000 students enrolling for the fall semester of 2023. Unsurprisingly, Fayetteville emerged as the hottest small rental market in the U.S. at the start of 2024, with almost three-quarters of the current renters in Fayetteville renewing their leases at the end of the college year rather than moving out.

Final Thoughts

Supply and demand remain the underlying factors determining the U.S. rental market. The Sunbelt has seen hundreds of thousands of new apartments come to the market and soften demand. However, chronic undersupply remains, especially with more affordable suburban single-family homes.

Buying with high rates remains a great challenge for investors, large and small. However, news of hedge funds buying up single-family homes or developers building amenity-laden skyscrapers should not be put off by smaller investors. Being nimble and on the ground puts you at an advantage. There are still deals to be had, provided you are creative enough to find them.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.