Stands to reason that if you make too much of something, you’re going to lower its price in the marketplace—basic supply and demand. But things don’t seem to work that way in apartment business today. They’ve been cranking out high rises and converting condos in every vacant lot and still rents keep rising. More apartments, more renters, higher rents.
According to rental boosters like Rent.com and rental industry analysts like Axiometrics, rents are defying gravity and what goes up keeps going up because the younger generation, the largest in history, plans to rent forever. It’s called the Rentorship Society.
Rental rates could rise by an average of 8% through next year, according to more than two-thirds of property managers surveyed by Rent.com. That’s a two percent increase over the estimated 6% rent hike predicted by their property managers back in 2014. Surveying property managers sounds like the rental version of the old survey tactic of asking real estate agents whether this is a good time to buy a home. Duh.
On the other hand, the ownership industry, led by the National Association of Realtors, finds in their surveys that most renters would much prefer to be owners but are trapped in place by rapacious landlords who steal their down payment savings with rent increases, relentless lenders who won’t give them a break on their standards, balky Boomers who won’t sell their homes and their local real estate markets, where supply and demand is indeed working well and prices are rising at a healthy clip. The wildcard in this standoff is the flood of new apartment buildings that are now opening for business and will continue to do so in the foreseeable future.
Multifamily construction is like a huge ocean liner. It takes a while to get the boilers stoked and the ship pointed in the right direction and once it’s got a full head of steam it takes even longer to stop. The rental boom was well underway before many developers could raise the funds and commence construction, which started to ramp up to $51 billion in 2013 and $57.9 billion in 2014. Now Dodge Data and Analytics expects it to keep going to reach $91 billion next year. Freddie Mac agrees. According to its 2015 Multifamily Outlook, multifamily starts and completions are expected to continue their upward trend. The number of starts will continue to rise through 2015 and perhaps 2016.
Multifamily housing construction is booming in several markets. New multifamily permits in 2015 were exceptionally high in the Northeast – it’s 423% higher than the 25-year norm in New York, 295% higher in Boston, and 290% higher in Newark, N.J. Multifamily construction is even high relative to historic norms in stingy San Francisco (102% higher) and Los Angeles (160%), according to Trulia.
Multifamily apartment buildings house only 61 percent of the nation’s residential rental units, according to the Joint Center for House Studies at Harvard. The balance are single family rentals, which boomed during the housing depression converting 5.7 million ownership homes to rentals. The end of cheap brought the single family conversion down to their pre-bust levels. These having among the highest median rents of any structure type, according to the Joint Center. It’s unclear whether the multifamily increase will have any impact on single family rates, since the rental products are significantly different.
While construction continues to ramp up, completions started two or three years ago are just now opening for business and making an impact on local markets. Freddie expects completions in 2015 and several years to come to be above average. Supply could begin to outpace demand this year. “However, depending on how much pent-up demand is released – that is, how many households are formed that would have formed earlier if not for the recession – demand could continue to outpace supply,” said Freddie. That’s a bit difficult to understand—don’t most marriages decrease demand by one rental unit
Other expert sources clearly see the new wave of apartments opening in 2015 and 2015 having a significant impact on rents.
- The Urban Land Institute forecasts that annual rent growth will slow, with all market tiers projected to see rent growth dip below 2% next year. While concessions offered to tenants remain manageable so far, a number of newer projects are offering free rent and other perks to expedite lease up.
- Over the next 12 months, CoStar predicts that 49 of the top 54 markets in its forecast are projected to see apartment vacancy increases through the end of 2015. Markets like Denver and Houston will see record deliveries over next two years, with each market have upwards of 20,000 units in the construction pipeline.
- “Will supply peak in 2015? As bullish as we hear investors are about pumping money into investments, and many REITs switching to development, it’s possible the construction run could extend well into 2016,” said CoStar real estate economist Francis Yuen.
- Axiometrics forecasts rent growth to remain relatively steady over the next five years, though 2016 will likely see further moderation as the impact of new supply takes hold and job growth decelerates to a predicted 1.7%. The rent growth rate is anticipated to average 3.5% throughout next year.
- Dodge Chief Economist Robert Murray, is optimistic that residential construction will be a key contributor to the health of the industry as a whole, with single family housing leading the way. Access to home mortgages is improving and decreases in unemployment will inspire more citizens to purchase houses in 2016, resulting in a 17% increase in starts (805K units) and a 20% rise in dollars to $224.8B. Multifamily housing will experience less robust growth but will continue to progress with 5% and 7% jumps in dollars and units, respectively.
- The Joint Center’s new report on rental housing affordability doesn’t see much relief in the increased multifamily capacity. With 412,000 permits issued and 355,000 units started in 2014, annual completions of multifamily units in 2015 are on track to top the 313,000 level averaged in the decade before the downturn. Although these additions to the rental stock should help to slow market tightening, demand continues to outpace supply in most metros, keeping pressure on rents and vacancy rates, says the report.