Small apartments are in, and it's causing rents in new buildings to drop
Rents for new studio apartments dropped 20.9% over the year in Q1 2024 due to a supply surge.
New US apartment construction hit a near-record high, with over 90,000 units in Q4 2023.
Despite lower rents for newly-built studios and one-bedrooms, larger units remain scarce and costly.
If you were thinking of moving, right now could be a great time to sign a lease on a newly-built studio apartment.
Developers have built a lot of new small apartments over the last few years, and the boost in supply has driven rents down. The median asking rent for newly-built studio apartments — those for which construction was completed in the previous quarter — was down 20.9% in the first quarter of this year as compared to last year, according to a new report from Redfin, a real estate services company.
Rents for newly finished one-bedroom apartments are also falling — the median rent fell 11.9% year over year in the first quarter of 2024, the report found. Redfin noted the number of new one-bedrooms was up 22.2% over the year in the fourth quarter of 2023.
The number of new apartments that recently hit the market is near a record high. More than 90,000 new apartments came online in the fourth quarter of 2023, finishing a big year of apartment construction, Redfin noted.
That additional supply may be outpacing demand, as the portion of new apartments that were rented out within three months of completion fell from 60% at the start of last year to 47% this year. The Redfin report is based on US Census data on "unfurnished, unsubsidized, privately financed rental apartments in buildings with five or more units."
"If you're looking for a rental and you've noticed a lot of new apartments popping up in your neighborhood, it may mean you have room to negotiate on price or ask for concessions like discounted parking or a free month's rent," Redfin senior economist Sheharyar Bokhari said in a statement.
But new housing isn't evenly distributed across the country. And the pace of new construction of both single-family and multi-family homes is starting to slow, in part because of persistently high interest rates.
Studios and one-bedrooms tend to be more profitable for developers to build than larger apartments, and developers aren't building enough apartments suitable for big families. The number of newly-built three-plus-bedroom apartments fell 0.9% in the last quarter of 2023, while the median asking rent rose 9.1% year over year in the first quarter of 2024, Redfin found. This is part of a longer-term shortage of larger apartments in urban areas.
In general, good news is rare in the rental market. Overall rents are still way up — 26% higher than they were in early 2020, a recent Harvard report found. Three in five housing markets across the country are seeing rents rise. And growing numbers of Americans can't afford their housing costs.
Half of all tenant households were cost-burdened as of 2022, meaning they spent more than 30% of their income on rent, the Harvard report found. That was the highest share since the US Census first started collecting this data, the report noted. The number who are severely cost-burdened — meaning they spend more than 50% of their income on rent — also hit a record high in 2022.
Renters are also increasingly locked out of buying a home. Home prices and mortgage interest rates have surged in recent years, putting homeownership out of reach for even more renters. The US home price index is 47% higher than it was in early 2020, and the median home price is about five times the median household income, Harvard's report noted.
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