Bargaining Power Is Shifting Toward Tenants As Multifamily Rent Growth Dissipates

After years of unbridled rent growth, a reckoning is on the horizon for U.S. landlords as a softening apartment market and rising expenses push the ball closer to the tenants' court.

New-lease asking rents rose just under 2% during the 12-month period ending in May, down from the double-digit increases seen a year ago and representing the largest deceleration in recent history, according to data aggregated by The Wall Street Journal from six national property data sources.

Some rent measures are already showing negative growth patterns, with Redfin recording an annual dip of 0.6% in May, per the WSJ. Overall, 48 of the 100 largest U.S. cities are posting negative rent growth for new leases on an annual basis, according to Apartment List.

An asking rent decline over a 12-month period hasn't occurred since the rental market took a brief hit in 2020. Before that, it hadn’t happened since the Great Financial Crisis.

The change in rental dynamics marks a major shift in what was considered an unprecedented winning streak for landlords. 

In just under two years, apartment owners were able to push rents by 25%, largely due to pain in the for-purchase market that propelled demand for rentals. In other markets, such as Miami and Riverside, California, rental rate growth was as high as 35%, per the WSJ.

The sudden drop-off brings much-needed relief for tenants, who have been pummeled by elevated asking and renewal rates in addition to rising mortgage rates that keep many from pursuing homeownership. But with vacancies rising and rent growth cooling, bargaining power is shifting away from landlords.

The consequences of prolonged rent declines could be broader than individual landlords taking hits to their bottom lines. Many investors took out large loans, assuming they could continue to raise rents. As that reality fades, the potential for widespread defaults and foreclosures comes into focus.

Some of that distress has already begun to materialize. Veritas Investments, the largest apartment landlord in San Francisco, in May stopped paying its mortgage on roughly a third of its local multifamily holdings, prompting its lender to market the sale of $1B in delinquent loans.

A troubled investment group in Houston lost control of its four-complex portfolio in a $229M foreclosure in April, an event that is expected to launch more multifamily distress in Texas.

CMBS delinquency rates for multifamily loans among major investment groups landed at 3% at the close of the first quarter, up from 2.9% at the end of Q4 and 2.77% in Q3, according to the Mortgage Bankers Association.

Higher interest rates, coupled with uncertainty around property values, are expected to impact loan maturities and push delinquency rates in the coming quarters.