Graphic: Where is rent increasing and decreasing the most?
Multifamily owners have enjoyed high occupancies and steadily rising rents in recent years. Critics who have been waiting for that tide to turn are going to have to wait a lot longer. Industry forecasts are predicting much the same performance through 2016 and beyond.
The apartment sector ended 2015 with a bang as it posted some big numbers for annual rent growth. Nationally, effective rents rose by 4.7% in 2015 compared to gains of 3.5% in 2014, according to Reis Inc. On its own, that rent growth represents a nice healthy boost for owners. What is even more impressive is that it comes after a multi-year run of strong rent growth that started back in 2010.
So, what’s driving that rent growth? Certainly, supply and demand fundamentals have been favoring landlords with vacancies that have remained consistently below 5% for the past several years. The average vacancy rate in the U.S. climbed a nominal 0.10% to reach 4.4% at the end of 2015, according to Reis. The steady stream of renters has been supported by demographic trends with both baby boomers and millennials contributing to a larger pool of renters. Some of the other key factors fueling renter demand include:
- Job growth: The U.S. added 2.7 million jobs in 2015, and the forecast is for employment to grow by an additional 2.6 million jobs this year, according to a 2016 Multifamily Investment Forecast by Marcus & Millichap.
- More renters by choice: Since peaking near 70%, home ownership is currently hovering at 63.8% with some forecasts predicting that it could drop lower before bottoming out at 62.5%, according to Green Street Advisors.
- Student debt: College students are carrying high levels of debt, which tends to prolong renting and delay homeownership. The average student debt load for recent grads has now surpassed $30,000.
Another factor giving rents a boost is that the new rentals being built are generally upscale properties with higher rental rates as land costs and construction costs have both taken a big leap in the past five years. The wave of new construction also has sparked more renovations and rehabs at existing properties. Landlords are spending dollars to give properties a facelift and add more modern amenities, and they are charging higher rents on the finished product.
The question is how long will the rental market be able to maintain those high occupancies and steady rent hikes amid a wave of new construction. Construction is at its highest level since the 1980s. Developers delivered 250,000 new rentals in 2015, and the forecast is for 285,000 more units to be completed this year, according to Marcus & Millichap. Nearly half of the new units will be concentrated in just 10 markets, notably New York City, Dallas and Houston rank as the top three for that construction activity.
The concentration of new supply in select markets highlights the fact that the multifamily outlook could vary widely on a case-by-case basis. In addition, a 2016 Apartment Market Forecast by Green Street Advisors called out the student housing sector specifically for facing a bigger potential problem due to excess supply. The student housing industry saw a 7% increase in inventory last year, according to Green Street.
One sign that leasing momentum might be slowing is that some metros are reporting a decline in rents. For example, San Jose and Las Vegas are two markets that reported notable drops in its student housing rents from January to February at 11%. On the other side of the spectrum, cities such as Milwaukee, Orlando, Fla. and Reno, Nevada also posted double digit gains of more than 12%, according to ABODO.
That gap between winners and losers again points to the fact that there are some big disparities in rental markets across the country. Yet, broadly speaking, market conditions remain firmly in favor of property owners. Reis is predicting that vacancies will inch slightly higher in 2016 and remain close to 5.5% through 2019. Rent growth also will drop to more modest levels, likely more in line with the rate of inflation, but rent growth will remain positive overall in the near term.