The days of pandemic pricing are long behind us.
Last year, landlords were so desperate to lock tenants into leases that they were willing to give away free months of rent to seal those deals. This year, there's a lot more demand for rentals as the U.S. economy has improved and Americans are shoring up their finances and solidifying their living arrangements. That's put landlords in a prime position to benefit.
According to Zumper's November rent report, the median one-bedroom rent is up 12.1% percent from the start of the year, while the median two-bedroom rent is up 13.2%. In some markets, rents are soaring even more.
But are rising rents something landlords should celebrate? Or should they embrace this trend with a degree of caution?
Leasing activity could wane if prices keep rising
Many landlords are operating in recovery mode after both a brutal 2020 and start to 2021. Not only have landlords struggled with vacancies since the beginning of the pandemic, but they've also lost out on revenue due to the long-standing federal eviction ban that only expired a few months ago.
At this point, it's clear that Americans are clamoring to sign leases. But if rental prices keep soaring, tenants may seek to go another route: purchase homes.
Granted, not everyone who's a renter will manage to just up and buy a home. But those who are financially secure and have some money socked away may tire of sky-high rent prices and seek to purchase a place of their own instead, especially with mortgage rates being so competitive. In fact, in July, Realtor.com found that buying a starter home was more affordable than renting a home in 24 of the 50 largest U.S. metro areas.
The demand for rentals could also fall as more units hit the market. As such, landlords should proceed with caution when jacking up rent prices. While many may be poised to capitalize on current demand, those who go overboard with rent increases risk alienating stable tenants and turning off new ones.
Some markets can better absorb rent hikes than others
The extent to which landlords can get away with rent hikes also depends on location. In popular metro areas, landlords have more leeway. In areas where the demand for homes isn't as strong, landlords need to be more cautious.
One thing for landlords to keep in mind is that a lot of people are still working remotely due to the pandemic. Once companies are able to better firm up their office reopening plans, the demand for rentals near business districts could soar. And so property owners with city rentals may be in a strong position to continue raising rent prices, even if, on a national level, rents begin to trend downward in 2022.
All told, right now, there's no reason for landlords not to be happy about an uptick in rent prices. But landlords will also need to strike a delicate balance in the coming year to ensure a steady stream of revenue.