Inflation has been a defining story for property owners this year. The annual inflation rate hit 9.1% for the 12 months ending June 2022, the largest increase since November 1981, and rents have had to keep pace right along with it.
Rental Rates Are Slightly Outpacing Inflation
Historically, rental rates track the broader market but tend to run 20 to 100 basis points higher. Right now, nationwide market rent growth sits at 13% while inflation is at 9.1%. Locally, CoStar data shows the average rent increase in the Central PA region has been 9.10% over the past year, slightly above the 8.61% increase seen from June 2020 to June 2021. That suggests rates may climb a bit further before both inflation and rents level out.
Rising Operating Costs Are Driving the Increase
Rents need to keep rising to hold up against significant increases in operating costs, including:
- Utility costs have increased 8-10% over the past year
- Property taxes are being pushed to their maximum permitted increases
- Insurance costs are escalating, averaging a 15% increase and rising as much as 40% or more in some markets
Tenant Affordability Remains Healthy
The good news is that apartment renter incomes are rising alongside inflation, and rents remain affordable relative to income across property classes. A housing ratio of 31% or less is generally considered sustainable. Class C renters currently carry the highest housing-cost-to-income ratio at 25%, while Class A renters sit at a lower 21%.
What This Means for Owners
Don’t be afraid to keep your rents on the increase to cover higher operating costs. Tenants across most property classes should be able to continue affording it, as long as you’re keeping the class of property you own in mind. Need advice on growing and protecting your portfolio through inflation? We’re always available for a strategy call.
