Flat vacancy rates are on the rise. The largest wave of new rental construction in nearly four decades is expected to cut into the rate of rent growth across the country.

Some high-demand Sunbelt cities are already seeing rent declines, partly because many tenants and flat seekers feel they can no longer spend their income on rent.

Meanwhile, rising interest rates are making rental property investments less profitable than they were a year ago, when debt was cheap and sharp rent increases were taken for granted.

We're bound to get some pullback," says Thomas LaSalvia, senior economist at Moody's Analytics.

Lower rent increases will help keep general inflation in check while bringing relief to many tenants whose wages have not kept up with rents.

Of the 44 million households that rent, more than 19 million spend 30 per cent or more of their income on rent and other housing costs, according to a December report by the US Census Bureau, which estimated spending from 2017 to 2021.

This reversal comes in the wake of an unprecedented run in the flat and home rental sector, which most housing economists say was shaped by the pandemic.

The early blockade created pent-up housing demand that later exploded in the months following the launch of the Covid-19 vaccine in late 2020.

Many young people went out to rent their first homes and the sudden increase in people looking for flats helped rents to climb by 25% in two years.

In particular, well-paid workers from the North East flocked to developing cities in the Sunbelt, where they could work remotely and where their higher incomes allowed for more space.

Now, many of these price-surging locations are seeing a slide in demand and a drop in rents.

According to Apartment List, between April and October 2022, rents fell 3 percent in Las Vegas, 2 percent in Phoenix and 1 percent in Tampa. Rents in all three cities had risen by more than 30 per cent in the previous two years.

If immigration and new household formation continue to slow, analysts say some markets could see a full 12 months of negative rent growth starting sometime this year.

Meanwhile, nearly half a million new flat units - the most in a year since 1986 - are expected to be built by the end of 2023.

That will be after more than 400,000 units are completed during 2022, according to an analysis by real estate data firm CoStar Group Inc. Adding so many new flats to a slowing housing market is expected to help curb rent growth.

Some cities with higher-than-average construction activity may even see year-round rent declines, said Jeff Adler, vice president of the data division at real estate technology firm Yardi Systems Inc.

He cited places such as Miami, Austin, Texas and Raleigh, N.C., where significant new supply is expected this year.

CoStar says the upcoming increase in new flats is most likely to affect rents in high-end buildings, as there may not be enough people earning enough money to rent them.

"The potential demand for newly developed [high-end] properties continues to depend only on the expanding households of high-income renters," CoStar said.

Amid growing fears of a recession, many housing economists believe job and wage growth will not be strong enough to sustain rental growth this year.

Yardi and Moody's expect rents nationwide to rise by about 3 per cent over the next 12 months, less than half of what they will be in 2022.

"Mr LaSalvia said when you look at real wages you see they have been quite stagnant over the last year or two.

However, there are still some favourable factors for the rental sector. Higher mortgage rates and higher home sale prices mean fewer people can buy their first home, boosting demand for rental homes and flats.

While new rental construction is expected to increase, most analysts believe there will still be an undersupply of the kind of affordable housing that is in greatest demand in most cities.

Analysts say these factors should help keep vacancy rates from rising too much and keep rents from growing negatively in most cities.

In the event of a recession, history shows that the rental sector is better able to cope with a bear market than other parts of the economy, as consumers are more likely to cut their spending.

Even so, investors are adjusting their expectations to a more challenging environment.

"In 2021 and early 2022, you can raise rents significantly without having to do much to the properties themselves," says Karlin Conklin, a principal at flat owner Investors Management Group, which owns buildings in the Sun Belt and on the West Coast." We don't see that happening in the future."

As interest rates have risen, borrowing money to invest in existing rental properties, such as renovating them to attract higher paying tenants, has become more expensive. Sales of apartment buildings have also fallen as a result.

According to a report by MSCI Real Estate Assets, building sales in November were 74 per cent below the year-earlier level, measured in terms of total dollar value.

The report states: the motivation for flat investment has changed.