Higher Rents Are Coming If Interest Rates Don’t Budge

Coming into 2025, hopes for an increase in housing construction were pinned on lower borrowing costs. But with longer-term interest rates remaining stubbornly elevated and the Federal Reserve showing no urgency to ease policy, higher rents and home prices will be needed to drive an increase in production. That’s grim news for renters and would-be homebuyers alike, but it’s the reality of the situation at a time of lofty construction and financing costs.

This dynamic is most clearly visible in the apartment sector, where a post-pandemic boom in new construction has turned into a bust. Developers started a ton of apartment projects in 2021 and 2022 in cities such as Austin, Texas, as rents surged and while interest rates were low. Once supply started to come online, vacancy rates rose and rents fell. That chill in market conditions combined with high interest rates has led to a slump in new construction. Renters are still somewhat insulated, but the industry is watching for when the slack is squeezed out of a market that’s past “peak supply” with the number of units set to be delivered expected to decline rapidly toward the end of this year and in 2026.