Rent Prices Are About to Shift | 2025 Rent Growth Forecast

Everything you know about rent growth could change in 2025. Today, I'm giving you my forecast for rent growth in the coming year. Hey everyone, it's Dave, and since prediction season is in full swing, today I'm bringing you a forecast on an important topic for investors, that's rent growth. So whether you're thinking about your existing portfolio or looking to land a new deal in 2025, understanding rent trends is crucial for underwriting your deals and the profitability of your existing portfolio. So let's get into this. During this analysis, I'm gonna be talking about single family and multifamily properties. If you don't know the definition of multifamily, at least how I'm gonna be using is five units or bigger. And I'm gonna be talking a lot about multifamily because these trends are really driving dynamics for all sorts of property. So even if you're a single family investor, you really need to understand what's happening in the multifamily market because you're competing for the same tenants and what's happening with multifamily rents will affect your portfolio too. First things first, where we are today, median rents have continued to climb really since the great recession. And as of right now, the median rent for a single family home is $2,250, which is wild. Multifamily, which is always a bit below single families, is still really high at $1,900 a month. If you wanna look at that in terms of growth rate, which I highly recommend it, that's really what we're gonna be talking about today is how quickly rent is gonna be growing or not growing for in certain places. We're gonna look at year over year figures. So basically we'll be comparing where rent was as of October of 2023 to October 2024. That's the last date I have as of this recording. So when we look at things that way, you can see that single family rent growth is actually quite solid. It grew 4.3% over the same period last year. And personally, when I look at rent growth, I like to think about it in comparison to the rate of inflation. Inflation is about 3% right now. And so when you look at single family rent growth, it grew about 1.3, 1.5-ish percent above the rate of inflation. And that's super important because if you're an existing investor, you know that inflation jacks up all of your costs. Taxes go up, insurance go up, maintenance, labor, all of that stuff goes up. And so a good barometer of whether rent growth is solid or not is whether or not it's beating the pace of inflation. And what you can see here is that it is at 4.3% for single family homes. But when you look at multifamily homes, that is not the case. Multifamily growth, depending on who you ask, is, according to Zillow, at 2.5%, which is okay, but slightly below the pace of inflation. If you look at other more multifamily specialist data, like RealPage or CoStar, just to name a couple, they're showing multifamily rent growth closer to 1%. So 1% to 2% below the rate of inflation, which basically means that you are losing spending power if you are the owner of one of those properties that's achieving the average growth. The reason that I'm splitting these up, single family and multifamily, is because there are very different dynamics in each of those markets. And it's important as an investor to identify the trends that are going on with the assets that you own. But also, this isn't always the case, but right now, what's going on in the multifamily and commercial market is really driving a lot of the dynamics that we actually see in the single family home. So even if you're a single family investor, or you buy other residential properties like duplexes or triplexes, it's important to understand what's happening in multifamily because the multifamily dynamics are driving rent behavior, even in those smaller residential properties. So let's talk about multifamily first and foremost, then I'll get back to single family. So what's going on with multifamily? Well, rent growth, it was super hot during the pandemic. It peaked out nationally in 2022 at about 10%, which was huge. Now it's down to about 1%. And I'm gonna be using CoStar data. This is a little bit different than where the Zillow data we're gonna look at for single family homes, but going down to about 1%. Now that is national. And one of the important dynamics here in multifamily is that you see this big divide in the multifamily market. Some areas have really slow or actually negative rent growth. We see a lot of markets that are actually in corrections. Just as an example, Austin has the biggest rent declines with 4.7%. Raleigh, North Carolina falls it up at almost 3%. So we are seeing corrections. They're not crashes, but that's a significant decline in rent prices. On the other hand, you see places like DC, Richmond, Virginia, Detroit, Cleveland, all see positive rent growth. So why is this happening? Why is rent growth slowing overall? And why are some markets doing so well when others are really starting to see a big correction? It really, in multifamily, all comes down to new construction and a glut of supply that has hit a market over the last couple of years. Basically what happened is during the pandemic, there was just a ton of new construction. Things were going really well for owners and operators of multifamily properties. Rents were going up, vacancies were super low, and so profits were near all-time highs. And that made people who build multifamily start building, and they built a lot. And even though these construction projects started in 2020 and 2021 and some in 2022, multifamily takes many years to get built. And so we're seeing second half of 23 and basically all of 2024, we're seeing all-time highs for the delivery of multifamily units. So you can see on this chart that during the pandemic, there's actually almost double what was normal from like 2014 to 2019. That is a lot of new supply. And even though there is a lot of demand for housing units across the country, when all of the supply hits at one time, it can create an inefficiency in the market. There's just too many units for the amount of people moving or looking for an apartment at a given time. And that pushes the vacancy rate up because all these new buildings can't fill up all their units, higher vacancy. When vacancy goes up, that puts downward pressure on rent prices because all these new operators, all these property owners are competing for a limited number of tenants. And the way you compete is by lowering prices or offering concessions like two months of free rent. Whether you offer it in lower rent or giving away concessions, that pushes down the total amount of profit. And that is what we're seeing in these lower rent rates across the country. So that is what's causing rents to grow slowly. And in some markets, what's causing them to go negative. And there's no coincidence here, but the markets that saw the biggest construction booms are the ones that are seeing those corrections, right? Because everyone was moving to Austin or to Raleigh or to Phoenix. There was so much demand there that all of the builders, all the developers decided that they were going to build multifamily in those super hot markets, but they all got in at the same time and they're all releasing these units to the market at the same time. That's causing the correction. Whereas in markets that weren't as hot like New York or DC or the Midwest, there's very little new multifamily construction coming online, which is keeping rent growth pretty high. So these dynamics of the glut of supply really primarily impact the multifamily market, but it can spill into the single family market as well. Because generally speaking, renters are looking for the best value. Most people, most renters, if you ask them, say that they want a single family home. But as we discussed earlier, multifamily rents are 10, 15, sometimes 20% cheaper than single family homes. And if trends continue in this route, the discount on multifamily is going up and up and up. And so at a certain point, renters are going to say, hey, there's brand new apartments with all these amenities. I'm going to go live there for cheaper than a single family home. And so that can constrain rent growth in certain single family markets. Again, it's going to be really regional. So this glut of supply is how we arrive where we are today. And next I am going to look forward to 2025. But first I want to ask you, are you ready to multiply your real estate investments or snag your first deal? Discover why Deal Machine is the top choice for both novice and seasoned investors who are eager to land more off-market deals. Imagine seamless access to accurate owner contact info for free. And it's powered by the same data that supports 90% of US caller ID, which helps boost efficiency and it reduces your search time. So forget outdated skip tracing methods and instead instantly find contact info for property owners hassle-free. Plus with Deal Machine's new private investigator tool, you can track down even the trickiest leads which include corporate landlords. So streamline your deal finding process and start your free Deal Machine trial today. Okay, now back to the forecast. I was saying before that an increase in multifamily supply has created downward pressure on rents even for small residential properties. But as we look forward, this dynamic is almost certainly going to change. And I rarely say these things looking forward with confidence, but multifamily, it's super easy to forecast because people have to get permits and all this data about construction starts. So we know years ahead of time when new units and new supply is likely to hit the market. And what we can see as you see in this chart here is that construction has really slowed down. We're actually below now pre-pandemic levels. So if you think of this as a pendulum, right? During the pandemic, the construction of multifamily swung into the very aggressive side. Then when rates spiked, people got very nervous about building and they saw this glut of supply and they didn't want to put any more supply out there. So construction has really, really come down. And we see this in all the forecasts. So just as an example, in 2024, there's supposed to be 657,000 new units hitting the market. Next year in 2025, that's going to drop to 337,000. That is a 49% drop in deliveries, which is an absolutely massive shift in the market. And the impact of this shift will take some time to impact rents, but it should create a better situation for property owners, right? If there are less new units hitting the market, you can expect to see vacancies start to go down. In fact, when you look at CoStar, who's sort of a data specialist in multifamilies, they expect vacancies to peak in the beginning of 2025 before slowly declining back to more long-term averages. And just as a side note, I just want to show you this chart. Vacancies in general are higher for higher end properties, which may be a little counterintuitive, but if you think about it, most of the new properties are higher end, they're brand new, they have new amenities, and that's where all the competition is, whereas some of the lower priced, older apartments actually are seeing better occupancy rates and solid profitability for most of those operators. Anyway, so back to the outlook for 2025, I think we're going to start to see this pendulum start to shift back in the other direction. Whereas for the last two or three years straight, we've seen oversupply. This year, we're probably going to see something like balance, right? We'll still have oversupply in the beginning of the year, and then we'll have a more normal balanced sort of rental market in the second half of 2025. CoStar predicts about 3.5% multifamily rent growth in 2025. I think that's in the right range, maybe a little high, I'd probably say 2% to 4% if I had to give my range, but I think it's pretty darn close given the information that we have right now. So that's the multifamily side, but if we look at single family or residential units, I think that this generally bodes well, right? Even with the oversupply of multifamily in the last couple of years, we've seen rent growth above the pace of inflation, and I don't really see any reason why that is likely to change. Perhaps the growth rate might start to come down a little bit. Again, it's over 4% now, but I think we'll probably see it outpace inflation from, I'd say, let's call it 4% to 6% nationally in the next year. Again, I don't think this is a big change. It's mostly a continuation of what we've seen this year. Before we go, I don't like to get into the business of making long range predictions, but I do think if we look beyond next year to 2026 and beyond I think one thing we should all be watching is if the pendulum is gonna stay on that other side, right? Because we have had all of these over deliveries of units and now we don't have a lot of construction, and the next couple of years are forecasted for a lack of supply. And again, it's gonna take a little bit of time for the current oversupply to get absorbed, but what happens there, we don't really know. We could get back into a market with above average rent growth. That is, of course, if the economy stays strong and we see wage growth continuing like it has over the last couple of years. Of course, we'll have to see, but it's something I recommend you all keep an eye on, whether you're a multifamily investor or a single family investor. And of course, on this channel, we'll always keep you posted when any new data trends emerge. Thank you all so much for watching. For BiggerPockets, I'm Dave Meyer. I'll see you next time.