Apartment Leases in 2034: Longer Terms, also Shorter

Predicting the decline of the traditional one-year lease and the rise of longer (and shorter) durations

Today’s Thesis Driven is a guest letter from Daniel Cohen, CEO of NextStory Capital. Cohen previously founded and was the CEO of Sentral, a residential and hospitality investor and operator.

“Things trend.”

A Yale-trained, notable economist who happens to be a friend once told me this when I asked him to sum up from his many years of study and research what he knew about the way the world works.

Ten years from now, urban living will look quite different than it does today, but current, long-term trends will drive those differences. Several of today’s housing problems will evolve and draw more attention from governments and activists, pushing the industry to embrace new norms.

This letter will explore two predictions about the future:

First, rental housing providers will have to provide tenants with more housing security, and the industry will respond by offering tenants much longer lease terms–the kind seen in many other countries but rare in the US today.

Second, in a world of longer average residential leases, a new category of shorter-term rental housing will emerge in which tenants select their own lease lengths. Those shorter-term leases will average three to nine months.

Starting with current long-term housing trends and what happens as they develop, here’s what to expect during the next ten years:

Pressure Builds to Protect Renters

Despite the past year’s slowdown in rent growth in some Sunbelt markets, a structural lack of housing supply (and low odds that trend reverses) points to continued demand for rental housing and multifamily rent growth. New for-sale home supply remained very low post-pandemic, and we have underbuilt housing relative to household formation for seven years (red line) and especially struggled to build single-family for-sale housing (blue line).

Source: Realtor.com

Those troubling supply trends compound the more recent problem of high borrowing rates that will likely be with us for the foreseeable future, and as a result much of the renting population will be renting for longer. This trend isn’t lost on landlords; the CEO of the largest apartment REIT recently celebrated “terrific demand” in the first quarter and noted “the percentage of our residents leaving us to buy homes was 7.8%, a continuation of all-time lows.“

So renters will largely remain renters. With that increased aggregate demand, the pressure on rents will get worse. And this will bring increased public attention to what until recently had been a regional issue: “Tenants’ Rights.”

While New York and Chicago are home to dozens of established non-profits and politicians fighting for the best interests of their cities’ renters, most U.S. cities and states have never seriously viewed renters as an interest group or constituency. During Covid that began to change, beginning with federal, state and local limitations on evictions – policies with significant potential unintended consequences.

Since the pandemic, the Tenants’ Rights movement has gained increasing legislative momentum. California and New York have passed “Good Cause Eviction” laws (GCE), which are designed to keep market-rate tenants from unexpectedly having to find a new apartment–what a landlord would call non-renewal–and from unanticipated high rent increases. Per New York State’s just-passed GCE law, NYC landlords now have to offer most market-rate tenants a renewal option and the renewal rent is capped. 

GCE may have come for very blue geographies, but I don’t expect GCE is coming for America – most localities aren’t that far left. However, the trend is important because GCE’s wins demonstrate a willingness to regulate more intensively the economic terms of private transactions between landlords and residents.

Evidence abounds of this trend toward more regulation. Other states (including Oregon, Colorado and Washington) and cities (D.C., Baltimore, Boston, Philadelphia) have some form of GCE law. There’s political support for GCE elsewhere, including Maryland and Connecticut. And many states and cities are taking tenants’ rights newly seriously: “There are campaigns to strengthen and expand existing rent regulation statutes in coastal cities, to lift statewide pre-emption laws in the Midwest, and to instate local control of rents in Western and even Southern states,” says far-left-leaning Protean magazine.