Multifamily Rental Prices Cresting

The Center for Housing Policy reports that rents across the U.S. are rising faster than incomes by about $1.75 for every dollar earned, which means landlords may be …

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The Center for Housing Policy reports that rents across the U.S. are rising faster than incomes by about $1.75 for every dollar earned, which means landlords may be reaching the peak of what they can charge for rent before forcing their tenants to look for more affordable housing. Even so, rent growth is not accelerating as much as researchers once predicted, and Reis reports only marginal increases. Those increases, however, have made a significant difference for renters despite the fact that low supply and increased construction in prime markets should be boosting prices even higher. For more on this continue reading the following article from National Real Estate Investor.

The next time your property management software recommends raising the rent on multifamily lease renewals, you might want to think twice.

“Landlords may be reaching the limits of what they can charge for marginal rent increases,” says Victor Calanog, vice president of research and economics for Reis.

Your computer system may automatically push rents higher when your apartments fill up. But residents will have to find that extra money somewhere—or they will have to move out. In markets across the country, rents have been rising faster than incomes.

The combined cost of housing and transportation in the nation’s largest 25 metro areas have swelled by 44 percent since 2000 while household incomes have risen only 25 percent. That means that for every dollar household incomes have gone up, housing and transportation costs have risen by about $1.75, according to the Center for Housing Policy—the research affiliate of the National Housing Conference—and the Center for Neighborhood Technology.

Stagnant rent

The growth of apartment rents has slowed in the last few quarters. Asking rents inched up by just 0.6 percent in the second quarter, while effective rents grew by 0.7 percent, according to Reis. That’s roughly half what rent growth was the year before.

“Given how tight the national market has become, historical data suggests that rent growth ought to be accelerating,” says Calanog. The percentage of vacant apartments is very, very low, and that should be pushing rents higher quickly. Vacancies stay at 4.3 percent in the second quarter, according to data firm Reis, Inc., based in New York City. The rate started falling from a high of 8.0 percent in late 2009 at the beginning of the economic recovery.

New construction should also be pushing rent growth higher. That’s because the rents at new apartment buildings tend to be higher than the rest of the rental market and, so far, the 27,000 new apartments that entered the market in the second quarter have been smoothly absorbed.

Effective rents did rise in all Reis’s top 82 metros—just not by very much. You would think that in a market like New York City, where the vacancy rate is stunningly low at just 2 percent, landlords could charge whatever they wanted for apartments at institutional-quality properties, but it isn’t so. Rents grew 0.9 percent in the second quarter.

“Rent growth remains muted due to relative weakness in the labor market—resilient though it has been—and tepid wage growth,” says Calanog.

This article was republished with permission from National Real Estate Investor.

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