These are good times for U.S. landlords. For many tenants, not so much.
With demand for apartments surging, rents are projected to rise for a fifth straight year. Even a pickup in apartment construction is unlikely to provide much relief anytime soon.
That bodes well for building owners and their investors. Yet the landlord-friendly trends will likely further strain the finances of many renters. That’s especially true for the 50 percent of them who already spend more than one-third of their pay on rent.
A 6 percent rise in apartment rents between 2000 and 2012 has been exacerbated by a 13 percent drop in income among renters nationally over the same period, according to a report from search portal Apartment List, which used inflation-adjusted figures.
"That’s what we call the affordability gap," says John Kobs, Apartment List’s chief executive. "I don’t see that improving in the near future."
The trend is straining the finances of tenants like Michael Strane, 39, who recently decided to move from his apartment in Pasadena, Calif., to cut his two-hour commute to work in half. His new apartment in the L.A. suburb of Whittier will cost him $1,045 a month, $200 more than he paid before.
"I’m actually paying more than I really feel comfortable paying right now," says Strane, a geologist. Asking rents in Whittier rose an average of nearly 14 percent last year, according to real estate data provider Zillow.
Rental demand has risen in much of the United States since the housing market collapsed in 2007. A cascade of foreclosures forced many people out of their homes and into apartment leases. At the same time, construction of apartments was stalled until the last couple of years because many builders couldn’t get loans during the credit crisis.
Add to that several recent trends, from rising mortgage rates to stagnant pay, which have combined to discourage many people from buying homes. It’s resulted in fewer places to lease and a bump up in rents.
The national vacancy rate for apartments shrank from 8 percent to 4.1 percent from 2009 to 2013, according to commercial real estate data provider Reis Inc.
As a result, landlords were able to raise rents in many markets. The average effective rent rose 12 percent to $1,083 during those years, according to Reis, which tracked data for apartments in buildings with 40 units or more. Effective rent is what a tenant pays after factoring in landlord concessions, such as a free month at move-in.
Over the same period, the median price of an existing U.S. home has risen about 14 percent, according to data from the National Association of Realtors.
Among major U.S. markets, rents rose the most in Seattle in 2013, up 7.1 percent from the year before, according to Reis. The second-biggest increase, 5.6 percent, was in San Francisco. Nationwide, effective rent rose 3.2 percent last year compared with 2012. Rents rose even as the nation added about 127,000 apartments, the most since 2009, according to Reis. The addition of those apartments hasn’t been enough to absorb the surging demand for rentals.
The Picerne Group is among the apartment complex owners with buildings under construction. The company, which owns properties in California, Arizona, Nevada and Colorado, expects to break ground soon on luxury rental buildings in the Southern California cities of Cerritos and Ontario. The buildings, which have nearly 500 units combined, are due to open next year, says Brad Perozzi, managing director of the company, based in San Juan Capistrano, Calif.
"We definitely see demand improving, especially the younger demographic coming out of college and being in their prime renter years," Perozzi says. "Even though the single-family home market is coming back, it’s still somewhat cumbersome to obtain a mortgage and come up with a down payment."