The Future Of The Rental Market For Landlords And Tenants
Founder and CEO of Rentec Direct, property management software for real estate professionals.
No industry has escaped the global pandemic completely unscathed, but the real estate industry has been regularly making headlines for happenings like skyrocketing home prices and extended eviction moratoriums. It seems the entire country is eager to return to normal, but what does the new normal look like? Despite progress, many aspects of both our daily lives and the greater economy don’t look like they did pre-pandemic — real estate included.
Here’s what we know: One study shows that more than 6.5 million American households are behind on their rental payments, meaning that landlords are collectively owed upwards of $20 billion. What comes next is difficult to predict (these are unprecedented times, after all), but there are a handful of rental market trends we can expect to stick around as well as a few that are likely to dissipate.
Rental Market Trends That Are Here To Stay
• Online, contact-free rent payments: Prior to the pandemic, just about half of tenants in the U.S. had already embraced online rent payment options, and the other half were either still mailing paper checks or their landlords did not offer online payment options (or both). Covid-19 encouraged both tenants and landlords to adopt modern technology and utilize online payment options — at one point in 2020, we saw interest in online rent payment options increase by almost 25%. We live in an era where not only can rent be easily and securely paid either online or via a mobile app, but it is also a service that is typically free for both tenants and landlords. For that reason, interest in online rent payment is here to stay.
• Heightened tenant screening: With federal and state eviction moratoriums in place, many landlords found themselves stuck with tenants who weren’t upholding their lease agreements. Some landlords have been without rental income for as long as 21 months, while still needing to pay property taxes, make repairs and fund other property-related expenses. Moving forward, it wouldn’t be surprising if landlords are more cautious than ever about who they place in their rental properties. Qualified tenants with secure employment and responsible financial habits and who prioritize open communication will be highly sought after.
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Rental Trends That Probably Won’t Last
• Low tenant turnover rates: Turnover has been lower than ever during the pandemic, primarily due to the eviction moratoriums in place. Normally when a tenant cannot or does not pay rent, they have to move out and find a property that they can afford. Right now, moratoriums are affecting the natural move-in move-out cycle. As moratoriums continue to be lifted and landlords pursue evictions, we will likely see turnover spike very high and then return to normal levels.
• Limited in-person contact: When social distancing guidelines were stricter, many landlords were postponing property inspections and even some non-urgent repairs in order to avoid unnecessary in-person contact. While this opened the door for trends like virtual property tours and inspections, we’ve already seen this start to change as ways to hinder the spread of Covid-19 become more commonplace, such as the vaccine, distancing, masking and other means. Property inspections and repairs are beginning to proceed normally for the landlords who can afford to do so.
What’s Next For The Rental Market?
Over the next couple of years, I believe we will see a high number of landlords exit the market. The costs we’ve seen landlords incur over the course of the pandemic have brought a lot of attention to the delicate nature of a low-margin business. I think landlords in many markets across the country will take advantage of the real estate market by selling and moving away from the rental industry entirely.
I also think we’ll see rental rates continue to increase, even if availability starts to increase. If landlords do decide to exit the market, supply will be affected and might be a catalyst for rent increases. In addition, landlords who decide to continue renting are likely to hedge against the next pandemic or policy change. Rents will need to rise in order for landlords to recoup costs and improve their profit margins.
While this may seem bleak in the short term, like many of the changes that the pandemic has wrought on the social and economic status quo, we will eventually see an evening out — a “new normal” as they say. Rising rents are nothing new; they have been increasing at a median rate of just over 4% annually for decades, even as high as nearly 12% in some years. The market will acclimate to these changes in time, as it has done in the past. Additionally, as existing landlords become disenchanted and exit the space, new landlords may eventually have the opportunity to enter.
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