The rental market, like everything else in the world, has seen quite an upheaval since the start of the pandemic in March of 2020. Most predicted doom and gloom for the housing market in general at that time, and more so for the rental market with the unprecedented actions taken by Government institutions to suspend the enforcement of leases through Eviction Moratoriums and even imposing suspension of rental payments.
Interested in what will happen to Rent Prices in 2024? Read our Updated Blog Post Here
However, what we saw play out over the last several years was quite the opposite with historic price increases in nearly every market in the United States.
With interest rates continuing to increase and the probability of a global recession at near certainty, it is worth examining whether this trend will continue in 2023; especially in the Northern Virginia market.
Rental Price Increases During the Pandemic
Remember “2 Weeks to Slow the Spread”? Seems like just yesterday doesn’t it? What seemingly was supposed to be a pandemic that lasted a couple weeks, then a month, then “maybe just lets write off 2020 as a crazy year”, turned into 2-3 years of unforgettable ups and downs.
Amazingly, for the housing market it was mostly up and this was also the case with residential rentals. Before we get into just how much rental prices went up over the last few years, let’s take a look at the reasons why this happened. The causes for this were many but we believe the top 3 were; zero percent interest rate and other “free money” policies, Record Unemployment, and the new Work From Home movement.
Government policy over the past few years has been especially financially generous to the American consumer. We are all familiar with the pandemic era stimulus checks that went out to individuals, but the level of cash across the board that has been infused into our society was simply phenomenal.
In addition to individual payments, large amounts of cash was distributed to businesses via the CARES Act through the Paycheck Protection Program (PPP) and other short term distributions. It is estimated that over $5 Trillion Dollars was handed out to individuals and businesses during the pandemic.
To put that number in perspective, that is nearly 25% of the entire US economic output (Gross Domestic Product) of our economy in 2022. In addition to these handouts the Government made it really easy to borrow money through low interest rates.
Zero Percent Interest Rate Policy has been in effect since the last economic recession in 2008 and what this essentially does is make the cost of borrowing money really cheap. It is fairly easy for most people with a decent income and credit score to get a loan for a car or house, and easy for businesses to raise money for expenditures.
When businesses have easy access to money that means they can hire more people and take more risks. You don’t need a business degree to understand that when businesses hire more, salaries go up and more people have jobs.
Simply put, when money is cheap, people have more of it and therefore the price of consumer goods go up. This is especially true with Real Estate. When more people have more money, the demand for housing rises, and therefore the price goes up. This includes rental prices.
Financial demand like this is something that you can easily learn about in an 101 Economics class, but we also say “Lifestyle Demand” was another cause that pushed the price of housing up even further. If you aren’t familiar with the term Lifestyle Demand don’t worry, it’s a term we created here at RentSimple to explain the new value people place on the physical structure they call home.
In essence, because people were home more than they ever were beginning in 2020 due to new Work from Home policies, they wanted to make sure that where they were living was the best physical space it could be. This meant people wanted bigger houses (preferably with home offices) with bigger yards.
Also, since most of the amenities that attracted most people to cities in the first place (restaurants, events, etc.) were either shut down or operating at a limited capacity, there was even less of a desire to live in cities.
In short, Lifestyle demand pushed people out from the city and the DC Suburbs of Arlington, Alexandria, Falls Church, to live outside the beltway in the exurbs in communities such as Ashburn, Haymarket, and Warrenton.
This created a new demand on housing in these areas never seen before, which in turn caused prices to rise yet again.
Now that we have thoroughly gone over the reasons why, what were the results? All these factors caused rent prices to surge over the past few years which we will break down.
The Dramatic Rise of Rent
In a normal environment, rents in a healthy economic region like Northern Virginia usually maintain an increase of between 3-5%; with more expensive rents getting less of a percentage bump than more affordable homes. This is what we saw consistently for the last 10 years and in the first half of 2020 as people largely remained where they were.
The graph below should tell you all you need to know what happened next. In this chart, courtesy of the Virginia Association of Realtors, the Northern Virginia market experienced a 13% rise in rental prices from the first quarter of 2021 to 2022 – a near 3x the standard inflationary rental increase!
This time period was essentially when we saw the most appreciation of rental prices as the policies mentioned earlier and the long tail nature of the pandemic began to take effect.
The good news is that healthy markets tend to correct and we have since seen rent prices taper slightly, and in 2022 rent prices in Virginia tracked a little less than the national average of 7.45%.
A lot of this market correction we saw at the end of 2022 when we experienced a complete leveling off in demand in the last half of the year and our RentSimple average days on market increased from 5.3 to 10.4 days. We found that we had to be more conservative with our pricing strategy at the end of 2022 and saw a reduction in application volume of near 70% for our available rental properties in NOVA.
Of course, rapidly rising rental income for a Landlord is an exciting prospect, but what the smart Landlord knows they need is stability and predictability. The good news is that this is exactly what we predict will happen in 2023.
What Will Happen to Rent Prices in Northern Virginia?
If you are a Landlord that came to the buffet line again in 2023 expecting to get another heaping serving of rent increases then I have bad news for you, and you may want to stop reading now…
Those expecting double digit percentage rent increases are going to be sorely disappointed and more than likely have their rental sitting vacant for a while. We expect rents this year to increase only modestly at between 2-4% depending on the price point and exact location of the rental property.
If this doesn’t sound good to you and you don’t want to believe it to be true, simply go back and read the reasons we laid out for rental prices surging in 2021. Government Stimulus – Gone. Work From Home – Gone (kinda.). Zero Percent Interest Rates – Really, REALLY GONE! This last point is probably the most important one; just take a look at the graph below illustrating the federal funds rate over the past 10 years so you can see how historically high it is right now. That is a steep, steep climb.
The federal reserve has all but expressly stated that their desired goal is to combat inflation through inducing a recession. This is a scary prospect but it is Newton’s 3rd Law in effect. If you are not a science guy, it’s the one about every action having an equal and opposite reaction. What goes up, must eventually come back down.
Recession Proof Region
It’s not all bad news though and in fact there is great news! If you are reading this article, it is likely that you live in Northern Virginia and one of the greatest things about living here is that our area does not experience recessions as hard as the rest of the country.
Not that we are “recession-proof”, but as close to it as you can get. The engine of our regional economy is the Federal Government and all the industries that directly and indirectly support it, which is largely immune to recessions. That in itself is reason for optimism amid a recession but Northern Virginia continues to attract growth from other industries as well, most notably tech. For Example…
Google announced an Investment of $300M in its Reston headquarters, and as we all know Amazon has begun work on construction of its HQ2 to be located in Crystal City. For more detail on that, check out the blog article we wrote on it. Speaking of Amazon, it was just announced in January 2023 that they will be investing $35 Billion in the area through its Amazon Web Services division.
Also fueling this growth is the new 11-story, 30,000 sq ft Virginia Tech Innovation Campus also in Crystal City, located in Arlington, just north of Alexandria. Just one quick drive through Crystal City today and you will notice tower cranes filling the sky with the construction of these buildings and new mixed-use apartment buildings.
Most notably the 2000 and 2001 South Bell Towers which will house 775 new residential units and 25,000 sq ft of retail space. This is in addition to the massive 1.2 million sq ft of mixed-use residential and retail space at the 1900 Crystal Drive development.
The Return to Normal
All this growth promotes stability, which should be the goal for any forward thinking Landlord. Additionally, all of the COVID restrictions once in place in Northern Virginia are now a thing of the past which means life will return to normal in the region in terms of where people choose to live. However, don’t expect the switch to happen overnight.
People have gotten used to the quiet and convenience of the suburbs and Hybrid work schedules have become the new normal. Employees can now split their time between the home office and their desk at their corporate headquarters, sometimes working as little as 2-3 days in a physical office (if at all).
Additionally, the new I-66 Express lanes and completion of 6 Silver Line Metro Stops has made the commuter lifestyle that much easier with a trip from the furthest lying suburb capable of being done in well under an hour. The demand for the exurbs of Prince William, Fauquier, and Loudoun Counties will wane a bit, but not as much as you may think. If you were one of the investors who purchased a rental property out that way, don’t panic, you’ll be just fine.
Strategies for Landlords in 2023
So with all this new info what should you do? How do you prepare your rental property for a likely slowdown of the economy in 2023?
The #1 thing you should do this year is not get greedy! Don’t assume that just because rents shot up in 2021-2022 that you can continue this climb and that somehow your property is different and therefore immune to a slowdown.
If you plan on raising your rent by another 10% this year as you have done in the past, you may be left without renters. This is not to say you should not charge the market rent — take some time to evaluate the current value of your home or contact us for a Free Rental Analysis and we will tell you exactly how much you should be charging.
The 2nd thing you should do is to make sure your property is up to date. Has it been painted in the last 5 years? How old are the appliances? What is the condition of the flooring/light fixtures, etc? If you think you need to update your rental property then you probably need to. Investors that “invest” in their rental property always win in the long run.
DO NOT have the mindset that “It’s just a Rental”, instead you should think “This is my biggest investment, how can I maximize its return?”
What to Look Out For?
If you are an individual Landlord there are some factors coming down the pike that you may want to look out for. Although, you don’t need a license to manage your own rental property you still need to be up to date on the Rules and Regulations surrounding Landlord Tenant Laws or it can cost you.
State and Local jurisdictions are very protective of tenants rights and the biggest mistake we see are Landlords that violate Fair Housing laws, with the newest one being Emotional Support Animals (ESAs). If you choose to have a blanket “No Pets Policy” you may be in violation of the Americans with Disabilities Act (ADA) and it will cost you thousands of dollars. For more info on that please read our detailed blog on the topic.
Another topic that is giving Landlords a little bit of heartburn is the issue of Rent Control. Rent Control, among other things, essentially limits the rights of the Landlord to increase the rent by more than the Consumer Price Index (CPI) measure of inflation.
This is already law in Washington D.C. but there is a nationwide push by Congress to make this a Federal law.
Hire a Property Management Company
If you want to make sure your investment is fully protected and your rent is guaranteed each month, the best thing you can do for yourself is hire RentSimple to manage your rental property! We stay up to date with all the regulations and trends in the Northern Virginia market and will make sure your rental property is rented quickly to well-qualified tenants.