In a typical year, the cost of rental housing increases by about 3 percent, but in the last three months of 2022, rents fell by 3 percent. That’s good news for tenants but a concern for investors and developers unprepared for risks that seem to have come out of nowhere in the housing market.

While investors were focused on worrying about collapsing home sales, a crash in the apartment market took shape in the fourth quarter, Bloomberg reported. At a time when there are more apartment units under construction than in the last 50 years, investors and builders have a new concern: how far will rental prices fall? 

What’s at risk? Capital dries up, multifamily developers go bankrupt and new construction nosedives, leading to years ahead of subdued building.

“The worry is that it will destroy the pipeline of new supply for years to come,” Conner Sen wrote for Bloomberg.

It’s about more than an industry shifting from a pandemic boom to a post-pandemic bust, Sen wrote.

Leading up to the 2008 recession, the housing industry focused on building detached single-family homes for sale rather than apartments, so there was an undersupply of apartments. Homeowners who lost their homes in the subprime mortgage crisis had to rent, which supported the rental market.

For millennials entering the workforce, rental demand was better than ownership demand at the time. Homebuilders became more conservative in the 2010s, while multifamily developers built as many apartments as they could to meet the demand from young millennials.

But now millennials want to buy homes and U.S. demographics in the 2020s lean toward ownership, not renting, according to Bill McBride, author of the economics blog Calculated Risk.

At the height of the pandemic, real estate investor Sabrina Must commanded more than $1,000 per night on a holiday weekend for her short-term rental two-bedroom, one-bathroom property in Encinitas, Calif. Now her rates start at around $275 on Airbnb, she told the Wall Street Journal.

Must saw a big drop in bookings starting in late spring 2022. By August, she had just one booking for the entire month. 

The demand for new leases slumped in the second half of 2022, and was negative for the full year for the first time since 2009, according to rental housing economist Jay Parsons.

During the pandemic, the number of single-person households exploded and they mostly moved into rented apartments while the homebuying market boomed. “The rental market pulled forward demand from the future. And it took until the second half of 2022 for that demand to be exhausted, leading to fewer lease signings, rising vacancies and falling rents,” wrote Sen.

Are developers and investors prepared for the soft rental market? Rents fell nationally by an average of 0.9 percent a month in Q4 compared to the 2017-2019 average of half that. The national apartment vacancy rate rose to 5.9 percent in December, the highest since April 2021, and has been rising by 0.2 percent a month recently, according to Apartment List.

Photo: Supporters of Proposition 10 for rent control and building more affordable housing, listen to speakers at a press conference, Oct. 24, 2018 in Sacramento, Calif. (Steve Yeater/AP for AIDS Healthcare Foundation)