The Great Absorption

For the first time since the Great Recession, U.S. apartment rents fell during the third quarter, a period typically marked by strong seasonal demand.

Average apartment rents across the country dipped .28% in the quarter, slipping into negative territory after anemic rent growth through the year, according to data analytics company RealPage.

Rent growth was last negative in the third quarter of 2009.

Counter-intuitively, absorption rates have remained strong, as apartment owners prioritize filling units over pushing rents higher. On the for-sale side, incentives have become standard practice among homebuilders to encourage buyers to purchase new homes, rather than letting inventory languish unsold.

Rental housing economist Jay Parsons said on LinkedIn that this year's rent growth headwinds are more supply-driven than economy-driven.

This isn't to say the economy isn't slowing down or could prolong the rent slump," Parsons said. "The one major economic indicator today worse than 2009 is consumer sentiment, which is hard to believe given what was happening in 2009, and only time will tell if those worries translate into something more."

While the market is still absorbing a high volume of new units, the rate of demand has begun to slow, a development that economists attribute to broader macroeconomic headwinds and a slowdown in job growth.

Sluggish new lease activity appears to be the primary driver behind a weaker-than-expected third quarter," RealPage Chief Economist Carl Whitaker said in a statement. "This sluggishness looks to be a reflection of broader macroeconomic headwinds as the nation has seen job growth slow quickly in the past few months."

From Peak Lease-Up To Normalized Absorptions

Through September, approximately 637,100 units were absorbed, a notable decrease from the nearly 784,900 units in the year leading up to the second quarter, according to RealPage.

The overall rental vacancy rate stood at 7.0% at the end of the second quarter. Meanwhile, many renters are choosing to stay put, as resident retention rates have increased year-over-year amid economic uncertainty.

During the Great Financial Crisis, the number of households — a key measure for the apartment industry—declined dramatically, Brad Case, chief economist with apartment developer and owner Middleburg Communities, said in an interview with The Builder's Daily.

We saw people moving in together to cut costs," Case says, adding that the trend held up to 2014. "That's not happening now."

Household formation began increasing significantly after 2014.

There's no sign of that stopping," Case says.

Cooling rents are a direct consequence of a 40-year high in new apartment deliveries, a phenomenon that intensified competition among landlords and forced them to prioritize filling units over raising rents.

Landlords have become more reliant on concessions to attract and retain tenants. RealPage said nearly 22% of apartments were offering discounts in the third quarter, with the average concession valued at 6.2% of the rent.

Case notes that those concessions — one to three months of free rent — push effective rents down.

That's a very temporary thing," he says.

When the leases renew, Case says tenants will be at the full asking rent level, or higher.

Where Apartment Supply is Headed

This supply-driven dynamic is most pronounced in Sun Belt markets that experienced a construction boom, while areas with less new inventory, such as San Francisco and Chicago, are still recording rent growth.

The rental market's performance varies significantly by region. The South and West, regions with heavy new supply, saw annual rent declines of 1.6% and 0.4%, respectively, according to RealPage data.

Some of the steepest price cuts occurred in supply-heavy metros such as Denver and Austin, where rents fell by nearly 8%, and Phoenix and San Antonio, which saw declines of about 5%. In contrast, markets with more moderate supply growth in the Midwest and Northeast saw modest annual rent increases of 2.4% and 1.9%.

The slowdown has also affected markets that are highly dependent on tourism, such as Las Vegas, Orlando, and Nashville, which have also lost momentum.

This divergence highlights how local supply and economic conditions are shaping a complex national rental landscape. Following record-high construction, apartment developers are pulling back on new projects, yet the delivery of new units remains high.

Case says the supply of new apartment units will diminish quickly.

We've already seen that the big supply surge is over," he says. "Demand patterns tend to last a long time. Sooner than you think, we'll be back in a situation where there isn't enough housing for everybody."