MNI INTERVIEW: CPI Rent Easing Expected To Continue - Apt List

Rent inflation in the CPI is likely to keep easing in coming months, albeit in fitful moves, bringing the measure back toward the top of its prepandemic range by the end of this year, Apartment List's senior housing economist Chris Salviati told MNI.

"My working assumption right now is that we're going to generally continue on the trajectory that we've been on and that gets us under 3.5% by the end of the year," he said in an interview.

"It's going to be some time before we get there. We're expecting that the rent component of CPI is going to be continuing on this modest downward trajectory through this year and probably into next year." (See: MNI: US Shelter Inflation Cooldown Seen Limited In 2024)

Apartment List's national year-over-year rent index turned negative in June last year and likely bottomed out in September. Salviati expects Apartment List's national index to rise later this year into the low single digits, but CPI measure of rents will continue to decline through early 2025. The Labor Department's most recent CPI report showed rents increasing 0.4% on the month and 5.7% over the year.

"What we've been seeing is there's this real long lag between what we're showing in our index and what gets reflected in the rent component of CPI," he said. "It's really just the case that CPI is measuring something different than what we're measuring in our index." The Apartment List rent index measures composition-controlled price changes for new leases, while the CPI tracks rent changes across all households.

Elevated shelter costs have been a key factor keeping the CPI above the Federal Reserve's 2% target, muddling the outlook for possible interest rate cuts this year.

The Apartment List rent index peaked in late 2021 at 18% and CPI rents peaked at 8.8% in February last year, a roughly 16 month lag. Salviati said that's a good baseline for the lag from the Apartment List's September trough to the CPI rent's trough, noting it could take even longer. Other indicators such as the Bureau of Labor Statistics' New Tenant Rent Index largely tell the same story of cooling market rents, though that measure has been prone to large revisions.

REGIONAL SUPPLY

A fresh supply of rental units has helped to dampen prices, he said. "There's still a huge pipeline of supply that's still getting constructed and we expect a lot of that to be hitting the market throughout the rest of this year, and so that definitely has a cooling impact but this does vary quite a bit market to market."

Apartment List is seeing a correlation between the markets with the biggest rent declines and those where there has been the most construction, Salviati said. "There’s a big difference between the situation in the Northeast and Midwest, where high inflation is lingering, and the West and South, where it’s moderating rapidly."

Austin is a prime example, he said. "Austin has had the nation's fastest new construction activity on a per capita basis for a number of years now and it's also got right now the biggest year-over-year rent declines, down about 7% right now."

"Even in markets seeing the fastest rent growth, the numbers are still relatively modest compared to the levels we were seeing a couple of years ago," he said. He pointed to Chicago, Illinois, Grand Rapids, Michigan and Providence, Rhode Island as standout markets.

Salviati did offer the caveat that Apartment List data is over-represented by large multifamily apartment complexes, buildings that tend to be newer, skewed towards higher price tiers, and facing more direct competition from new supply. "The declines that we're seeing in our index might not be as representative of the lower priced segments of the market."