These are good times for U.S. landlords. For many tenants, not so much.
With demand for apartments surging, rents are projected to rise for a fifth straight year. Even a rise in apartment construction is unlikely to provide much relief anytime soon.
That bodes well for building owners and their investors. Yet the landlord-friendly trends will likely further strain the finances of many renters.
A 6% rise in apartment rents between 2000 and 2012 has been exacerbated by a 13% drop in income among renters nationally over the same period, according to a report from Apartment List, a rental housing website, which used inflation-adjusted figures.
“That’s what we call the affordability gap,” says John Kobs, Apartment List’s chief executive. “I don’t see that improving in the near future.”
Demand for rental housing has grown as the U.S. economy has strengthened since the end of the Great Recession nearly five years ago. Steady job growth has made it possible for more people to move out on their own and rent their own apartments. Yet rising home prices are preventing many from buying.
A combination of rising rents and sluggish pay gains will likely continue to weigh on the U.S. economy, which relies primarily on consumer spending.
Rental demand has risen in much of the U.S. since the housing market collapsed in 2007. A cascade of foreclosures forced many people out of their homes and into apartment leases. At the same time, construction of apartments was stalled until the last couple of years because many builders couldn’t get loans during the credit crisis.
Add to that several recent trends, from rising mortgage rates to stagnant pay, which have combined to discourage many people from buying homes. It’s resulted in fewer places to lease and a bump up in rents.
The national vacancy rate for apartments shrank from 8% to 4.1% from 2009 to 2013, according to commercial real estate data provider Reis.
As a result, landlords were able to raise rents in many markets. The average national effective rent rose 12% to $1,083 during those years, according to Reis, which tracked data for apartments in buildings with 40 units or more. Effective rent is what a tenant pays after factoring in landlord concessions, such as a free month at move-in.
Over the same period, the median price of an existing U.S. home has risen about 14%, according to data from the National Association of Realtors.
Among major U.S. markets, rents rose the most in Seattle in 2013, up 7.1% from the year before, according to Reis. The second-biggest increase, 5.6%, was in San Francisco. Nationwide, effective rent rose 3.2% last year compared with 2012. Rents rose even as the nation added about 127,000 apartments, the most since 2009, according to Reis. The addition of those apartments hasn’t been enough to absorb the surging demand for rentals.
The Picerne Group is among the apartment complex owners with buildings under construction. The company, which owns properties in California, Arizona, Nevada and Colorado, expects to break ground soon on luxury rental buildings in the Southern California cities of Cerritos and Ontario. The buildings, which have nearly 500 units combined, are due to open next year, says Brad Perozzi, managing director of the company, based in San Juan Capistrano, Calif.
“We definitely see demand improving, especially the younger demographic coming out of college and being in their prime renter years,” Perozzi says. “Even though the single-family home market is coming back, it’s still somewhat cumbersome to obtain a mortgage and come up with a down payment.”
Even with more buildings under construction, rising demand will push rents up in many markets. Reis expects a stronger job market to enable more people to start renting their own places instead of living with roommates or parents. As a result, the firm predicts that effective apartment rents will increase 3.3% this year to an average of $1,118 nationally.
Higher demand and rising rents, unwelcome as they are for tenants, will produce more income for owners such as apartment REITS. These real estate investment trusts operate buildings they acquire or build.
Steadfast Income REIT, based in Irvine, Calif., is counting on rental growth and demand to continue rising in Texas, Illinois, Kentucky, Oklahoma and the seven other states where it’s invested $1.6 billion to buy buildings with a total of about 16,000 units.
The company has avoided coastal markets, where apartment buildings for sale tend to command high prices, making it harder to turn a profit without charging rents that could price out many tenants. Steadfast likes to buy buildings where it can make money while serving tenants who earn between $45,000 and $75,000. On average, it charges $950 in rent, says Ella Neyland, Steadfast’s president.
Steadfast has 40% of its holdings in Texas, where an energy boom is creating jobs faster than the national average. Those jobs are luring people to cities like San Antonio and Houston and driving up demand for rentals.
“Every single day I have some apartment home in my portfolio that’s up for renewal,” Neyland says. “As the market improves, I increase the rents.”