The Harvard Joint Center for Housing Studies (HJCHS) has some good news for landlords: Rents are not done rising. In fact, thanks to higher-income households opting to rent instead of buy in 2021, rents in 2022 are likely to surge as an increased number of households compete for limited rental space. The increased competition could accelerate the looming “affordability crisis” for many households, however, driving some middle- and lower-income renters to consider relocating to find more affordable options.
“The pandemic has brought the long-simmering rental affordability crisis to the forefront,” observed Chris Herbert, HJCHS managing director. Herbert warned that there is likely to be a particular shortage of low-cost rentals and rentals modified to accommodate aging tenants in the next two decades. “The number of renter households headed by a person aged 65 and over has already climbed to 7.2 million and will continue to rise,” he said.
Interestingly, much of the demand for rental units has not taken place in urban areas but, instead, in suburban and rural parts of the country. In fact, according to the same report, single-family home rentals posted an increase of 3.6 million households in “suburban and small metro locations” in 2021, and most of the new additions to the renting population should be categorized as “higher income households.” This is driving the demand for amenity-rich rentals and, Herbert noted, affecting investor and developer impetus to create more middle- and low-income housing.
For investors, it is important to weigh the benefits of housing high-income tenants – many of whom would have preferred to buy instead of rent and may not necessarily be long-term renters – and the demand for more affordable housing. In many cases, there may be non-monetary benefits such as public-private partnerships and tax advantages or credits available to investors offering this type of housing in certain areas of the country.
The rise in rent rates in upper-end rentals is hard to beat, however. In fact, according to CoStar, after a brief, late-2020 dip, higher-quality apartment rents soared by nearly 14 percent over the course of 2021. With vacancy rates at all-time lows, steady tenants with good payment histories who are willing to pay competitive, top-of-market rents may be impossible to turn down. Real estate investors will have to evaluate each market and make the decision for themselves.