New Supply of apartments is down, will rents increase again?

The cost of construction materials are still high, labor construction is in short supply and land is still expensive. Interest rates for new development are about 2-3 times what they were in recent years.   Put all of these together and it’s hard to make sense of trying to build anything new right now.  

The populations of South Eastern Idaho and Northern Utah as a region are growing by about 1.6% per year.  If the construction of new units doesn’t keep up, what will that mean for competition for apartments and apartment prices?  Well before you start to run the numbers, it may not be as simple as a little economic formula of supply and demand.   

New construction supply has been lagging behind surging demand for years.  Yet over the last year rents started to drop, though minimally.  Why?  Because even if supply is low, renters don’t have infinitely deep pockets.  If the average apartment becomes more than the average renter can pay, renters find alternatives.  Living with a parent, combining households and other strategies have started to become more and more common in the last couple of years in a trend that is referred to as “housing consolidation”.   When we factor for the pricing of rents, it’s not simply a supply and demand equation, but has also become a rent to income equation.  Incomes have risen, but if costs have as well, there isn’t a great net benefit to those that rent.

The downside for renters… rents likely won’t drop any time soon and actually may rise a again if new units remain unbuilt for too long.  Will the increases be astronomical like they were in the past few years?  Probably not.  You can only afford what your wallet allows you to.   While low vacancy and high rents are a positive for investors, stressing the boundaries with tenant incomes can also come at the cost of increased evictions and missed rent payments. 

What could get rents to come down?  Construction Labor and supply costs would need to come down.    Interest rates will likely take a toll on the price of land and other asset types over time.  But currently there is a lot of room where the pricing needs to fall in order for developers to jump back in and begin building again.