MNI INTERVIEW: US Rent Inflation May Turn Negative - Apt List

Rent inflation is likely to ease in the December CPI report due Thursday and potentially turn negative by the second quarter of this year, online rental marketplace Apartment List's senior housing economist Chris Salviati told MNI.

Apartment List's national rent index has been declining for the past four months and is expected to slide further before turning higher again later in the spring. The index fell 0.8% in October, over 1% in November, and 0.8% in December, the three sharpest month-over-month declines in the history of the index going back to 2017, and is down 3% since its August peak.

"We're now starting to turn a corner after a period of really rapid rate growth where we're now starting to see a shift to a much cooler market," Salviati said in an interview. Rent in November and December rose by roughly 50bps less than in the same months in 2017 to 2019, according to Apartment List data.

That should drag down the rent component of CPI, which has hovered at around 0.8% for the past three months, said Salviati. "We've probably got at least a couple more months of positive month-over-month growth in the in the shelter component of CPI before it starts to peak, but I do think that we might start to see those monthly rates slowing if not turning negative potentially in the first quarter but certainly in the second quarter."

BARGAINING POWER

The Labor Department's CPI report Thursday is expected to show core inflation nudging up 0.3% in December after surprising lower with a 0.2% gain in November. Analysts expect the rate of price increases in the owners’ equivalent rent and tenants’ rents categories to dip by about a tenth compared to November.

CPI rent may take some time to catch up to other other measures of rent price growth, Salviati said, pointing to a recent Cleveland Fed report that launched new indexes tracking rental price changes for new and existing tenants and has shown a drop in rental prices. (See: MNI INTERVIEW:US CPI Rent Costs To Gain Momentum - Fed Economist)

The larger story in 2023 will be cooling demand colliding with increasing supply, driving a cool down in price appreciation. While a recession could push rents negative, Salviati's baseline is for the Apartment List's national rent index to rise between 0% and 3% this year, below its 3.8% gain in 2022 and a 17.6% jump in 2021.

Vacancy rates have normalized since bottoming in the second half of 2021 at 4.1%, reaching 5.9% in December, and there's potential it could move above 7%, he said. With a record number of multifamily apartment units under construction, "It's certainly possible that we could see kind of a bit of a glut in new supply at least temporarily," he added.

"Later this year we might be in a in a scenario where you've got properties competing for renters to fill their vacant units rather than the other way around."