Graphic: Where is rent increasing and decreasing the most?
Apartments owners and managers have been reveling in near record high occupancy levels and steady rent growth for the past few years. Those who are wondering how long those good times will last may be pleased with the answer. The robust demand is not just a flash in the pan, but potentially a fundamental shift fueled by an expanding pool of renters.
The U.S. has seen a spike in renters in the past decade. In fact, nearly 9 million rental households have been added since 2005, according to a new report on America’s Rental Housing: Expanding Options for Diverse and Growing Demand that was released by Harvard’s Joint Center for Housing Studies. The report estimates that the rental market now includes 42.6 million families and individuals.
The housing crisis pushed more people into the rental market. For many with ruined credit or difficulty in obtaining a mortgage, buying a home is not an option. In fact, homeownership at 63.8% is now at its lowest level since 1989, according to the U.S. Census Bureau. Added to that is a growing renter-by-choice segment of the market. Some people prefer to rent, because they are worried about the downside risk of being stuck with a home they can’t sell. Or, they want more freedom to be able to relocate to another city or state if opportunities arise.
The rental market has been buoyed by changing demographics. On one side are aging baby boomers and empty nesters that are downsizing from a home to a rental that is less cumbersome in terms of upkeep, maintenance and expense. On the opposite side is the up-and-coming generation of young millennials. These two groups of renters are creating a barbell effect that is driving more customers to apartments. Based on 2015 data from Pew Research, boomers ages 51 to 69 are 73.9 million strong, while millennials ages 18 to 34 are an even bigger group at 75.3 million.
Millennials also have been a boon to the student housing market. According to the 2015 ABODO Student Housing Report, college enrollment numbers peaked in 2011 at a record 20.4 million students nationwide. Although enrollment has declined slightly, it remains above historical levels with a total of 19.5 million students enrolled at two-year and four-year colleges and graduate schools as of the 2013-14 school year.
Those demographics are expected to produce sustained demand and continued rent growth. For example, the top cities for rent growth in March are Portland with a 14% increase, followed by Indianapolis and Pittsburgh both at 12%, according to ABODO. Yet there are some markets where new construction or a shift in supply is creating a blip in demand and rental rates. The three markets with the biggest drop in rents in March include Tucson at -17%, Sacramento at -16% and Ann Arbor at -15%, according to ABODO.
Yet the broader outlook for the U.S. apartment market remains positive. Reis reported year-end vacancies at 4.4% with a forecast that vacancies will climb slightly higher to hover at about 5.5% through 2019. Marcus & Millichap has released a similar forecast with vacancies of 4.2% that are anticipated to move only marginally this year to 4.3%. That demand is continuing to keep upward pressure on rents. Effective rents rose 5.6% in 2015 and Marcus & Millichap expects rents to rise another 5.0% this year. According to ABODO, the five states that are reporting the highest average rents include California, Hawaii, Massachusetts, New Jersey and New York.