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Soaring capacity may be starting to slow the tide of rent increases that have spurred real estate investment and the greatest multifamily construction boom in seven years and record numbers of single family rentals.

New Capacity May be Softening Rents

Soaring capacity may be starting to slow the tide of rent increases that have spurred real estate investment and the greatest multifamily construction boom in seven years and record numbers of single family rentals.

The Multifamily Production Index (MPI), released by the National Association of Home Builders (NAHB) last week, improved for the eighth consecutive quarter with an index level of 54. It is the highest reading since the second quarter of 2005. The MPI, which measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100, rose from 51 in the first quarter to 54 in the second quarter.

Millions of small real estate investors, encouraged by rising rents, have contributed to the nation’s rental capacity by buying distress sales and converting them to single family rentals. The National Association of Realtors reports investors purchased some 1.23 million properties last year, more than a quarter of all homes that were sold in 2011.

“The strength of the MPI suggests that multifamily production is likely to increase somewhat going forward,” said NAHB Chief Economist David Crowe. “Multifamily production has already recovered substantially from a historic low of about 110,000 starts a year in 2009 and 2010 to the current annual rate of a little over 200,000. However, prior to the downturn multifamily starts remained about 300,000 per year for 12 consecutive years, so there is room for further improvement before apartment and condo production return to normal, sustainable levels.”

However, the latest data suggests that in some leasing markets the bloom may be off the boom in rising rents.

Nationally, rents rose 4.7 percent in August from a year ago, which, while still a gain, is down from the 5.8 percent annual increase in May – making it the slowest rise since March, according to Some markets, however, are still hot, with rents up around 10 percent year over year. These include Houston and Seattle, Denver and San Francisco.

“Rents had been on fire earlier this year, but some of the hottest rental markets are starting to cool,” said Jed Kolko, Trulia’s chief economist, told Diana Olick of CNBC. “New construction that started last year is finally coming onto the market, giving renters more choices and some relief from rising rents. Still, rents are climbing in nearly all of the major rental markets.”

In the second quarter, vacancies may have peaked, hitting a new 10-year low and rents rose at a pace not seen since before the financial crisis, according to real estate research firm Reis Inc. The average U.S. vacancy rate of 4.7 percent was the lowest since the fourth quarter of 2001, down 0.2 percentage points from the prior quarter.

Asking rents jumped to $1,091 per month, 1 percent higher than the first quarter and the biggest increase since the third quarter of 2007. Excluding special perks designed to lure tenants, like months of free rent, the average effective rent rose 1.3 percent to $1,041.

Soaring rents are have an impact. Rents have been rising so fast in San Francisco that tenant activists say the incidence of renters being forced out of their apartments is on the rise. San Francisco Rent Board statistics show that eviction numbers have stayed consistent over the past two years, but advocates say renters often move out before the point of eviction, according to coverage by Carolyn Said of the San Francisco Chroncle last week.

“Every time I see that the real estate market is getting better, I say, ‘Oh no,’ ” said Ted Gullicksen, executive director of the San Francisco Tenants Union told her. “Rents have gone through the roof, so there’s a lot of pressure to get long-term tenants out” so landlords can charge higher rents or sell their properties.

Asking rents in San Francisco were up 12.9 percent in the second quarter, to an average $2,734, according to RealFacts.

In Memphis, Memphis Invest reports an overall vacancy rate of 5.2 percent, down nearly 50 percent from Q2 2011 when it was 7 percent.

Dallas also reports strong leasing activity in the second quarter; 8,030 units, compared to net move-outs of 270 units in the previous quarter. Despite the early year reduction in apartment demand, first-half net absorption of 7,760 units far-outpaced the decade average of 7,390 units annually. Overall apartment vacancy regressed 100 basis points quarter over quarter to 5.9%, compared to the prior three months when vacancy was unchanged. In Dallas, ocal apartment operators increased average asking rent 1.5% over the previous quarter to $818 per month. Despite the over gain, operators in the South Fort Worth submarket reported rental rate declines of 3.8%, according to the Stamar Manage,em Group.

The expensive rental market of New York City loosened up slightly in the second quarter, with vacancies inching up 0.2 percentage points. Yet with a vacancy rate of 2.2 percent, New York remains the tightest market in the country and is by far the most expensive.

New York’s effective rents rose at a rapid 1.7 percent clip from the previous quarter and 3.9 percent from a year earlier. The average renter’s effective monthly tab of $2,935 beats the second-most expensive city, San Francisco, by over $1,000.

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