Graphic: An analysis of rental pricing data and trends from April 2015 – December 2015.
Despite a surge in new construction, the U.S. apartment market continued its bull run in 2015. Strong rental demand has helped to keep occupancies near record highs. Although that has been a boon to property owners and developers, it is less welcome news for renters who have watched rents climb ever higher.
The apartment sector has been a clear leader in the real estate recovery with steady improvement in key fundamentals over the past five years. The lingering effects of the single-family housing crisis along with favorable demographic trends have helped to create a sizable and growing renter pool. Although homeownership ticked slightly higher to 63.7% in third quarter it is still at its lowest level in nearly 25 years, according to the U.S. Census Bureau.
Healthy renter demand has produced a “landlord’s market” in numerous metros across the country. Nationally, vacancies remain tight at 4.3%, according to third quarter data from Reis. That demand also has set the stage for robust rent growth. As of third quarter, effective rents rose by 4.3% on a year-over-year basis, according to Reis. In fact, during third quarter, effective rents rose in 81 out of the 82 markets the firm tracks in the U.S.
Apartments that cater to students are experiencing much the same market conditions. In fact, the short supply of available rental housing near some top campuses in major metros is pushing prices to premium levels. For example, the top 10 most expensive campus rental geographies in the country reported an average rent of $3,266.60 for a one-bedroom unit as of Nov. 1st. That represents an 8.0% increase since late January when average rents for those 10 schools was at $3,025.40, according to ABODO.
That data is further testament to the highly competitive rental housing market that exists, particularly in urban markets. There are more “renters by choice” in today’s housing market, as well as hurdles that still remain for some renters who would prefer to buy a home. Chief among those obstacles are more stringent financing requirements. Home prices also are appreciating, while wage growth for most Americans has remained flat. Home prices are up 5.8% year-over-year with some high-demand markets such as San Francisco, Dallas and Denver reporting increases above 8.7%, according to a recent housing market report released by JLL.
The big question for the apartment market is how much longer that rent growth will continue as renter demand has unleashed a wave of development activity across the country. In 2014, the number of completions totaled 255,600, which is the highest level since 2009 when 259,800 units were built, according to the National Multi Housing Council. Some industry estimates are forecasting that completions will top another 210,000 units in 2015.
It remains to be seen whether renters will gobble up that space, or if it could create a drag on the market – adding to vacancies and reducing the property manager’s power to push rents higher. Given the amount of new space that has been built in recent years, coupled with projects still underway, odds are that the new supply will at least temper rent growth. Vacancies also are likely to edge slightly higher as it takes time to absorb the excess space.
Some metros are already beginning to see some “softening” of key fundamentals due to the increased supply. For example, Washington, D.C., Boston, Raleigh-Durham and Austin have all seen new supply outpace demand for the past 18+ months, according to JLL. To that point, new supply has brought some rent relief to students. Boston College, for example, has seen local rents drop in 2015 from an average of $2,162 for a one-bedroom unit in January to $1,825 as of November, according to ABODO.
Yet cases of declining rents are likely to remain in the minority in the coming year. Industry forecasts anticipate that occupancies will remain high and rent growth, although at a slightly lower level compared to recent years, will outpace inflation again in 2016 in most metros. For student renters, that presents a continued challenge to find affordable housing within easy reach of college campuses.