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Wallet squeeze: Apartment rents projected to rise again

Even with surge in new apartment construction, most US renters can expect rent hikes this year

Wallet squeeze: Apartment rents projected to rise again

Just when you thought your rent would go up again this year, you're right. -CLEVERNESS FEELS FORCED.

Average U.S. apartment rents are projected to rise for the sixth year in a row. And a surge in apartment construction is unlikely to slow rent increases in most large cities.

The trend is unlikely to change anytime soon because demand for rentals remains high, giving landlords leverage to raise rents. A resurgent job market is making it possible for more people to afford their own apartment, while many would-be homeowners must keep renting, unable to qualify for a mortgage.

Here are the few reasons why apartment dwellers will likely see their rent rise again this year:

--RENTS: A LESS PAINFUL INCREASE THIS IS NOT A WHY. IT'S A TREND.

The average effective (DO WE NEED THIS WORD? IT'S JARGONY) rent will rise from 3 percent to 3.5 percent this year, according to Marcus & Millichap, a commercial real estate services firm. That's above the long-term average growth of about 2.5 percent.

That's a slower increase than last year, when the average U.S. monthly rent climbed 5.2 percent to $1,179, according to the firm. Effective rent is what a tenant pays after factoring in landlord concessions, such as a free month at move-in.

"The only relief in sight is rents in the hottest markets are going to go up at a slower pace, but they're still going to go up," said Hessam Nadji, chief strategy officer at Marcus & Millichap.

The cost of renting has risen steadily in recent years. Effective rents climbed nationally an average of 15.2 percent between 2007 and 2014. Denver notched the biggest increase, vaulting 41.9 percent in that period.

Now the median U.S. renter is paying about 30 percent of their income on rent, which is a high water mark historically. And in more than 270 metropolitan areas the amount of income being spent on rent is above historical levels.

--MORE JOBS MEANS MORE RENTERS

A stronger job market and economy are driving up demand for rental housing.

There are now 3.2 million more Americans with jobs than there were 12 months ago. Between November and January the U.S. economy added an average of 336,000 jobs a month. That's helped bring down the nation's unemployment rate to 5.7 percent from 6.7 percent a year ago.

Wages have begun to rise recently. Average hourly pay rose 0.5 percent in January, the most in six years.

The steady job growth has made it possible for more people to afford their own apartments, a trend that's expected to continue.

"The share of young adults with jobs has climbed in the past year, and that will help many of them move out of their parents' homes," said Jed Kolko, chief economist at the online real estate firm Trulia. "Most of them will be renters first."

Generally, metropolitan areas with faster job growth are seeing bigger rent increases.

Consider the three metro areas that notched the biggest annual increase in rent in January, according to Trulia: Denver (14.2 percent), Oakland, California (12.1 percent), and San Francisco (11.6 percent). Each market has also registered annual job growth of at least 2 percent.

--WOULD-BE BUYERS STUCK RENTING

Traditionally, rising rents make homeownership more attractive, especially when interest rates are near historic lows.

But the rebound in U.S. home prices in recent years has made it more difficult for would-be homebuyers to qualify for a home loan.

U.S. home prices grew 7.4 percent last year, according to real estate data firm CoreLogic. That's down from a gain of 11.1 percent in 2013.

As a result, many would-be homebuyers are staying in rental housing longer, as they work to save enough for a down payment. That's one reason the U.S. homeownership rate ended last year at a 19-year low of 64.4 percent.

When fewer renters can transition into homeownership even as rents rise, that's good news for landlords.

--CONSTRUCTION NOT ENOUGH:

Developers added 238,000 apartments nationwide last year, a 14-year high, according to Marcus & Millichap. The firm forecasts that another 210,000 will be added this year.

THE WAY THIS IS WRITTEN ISN'T A CLEAR ILLUSTRATION OF THE SUPPLY DEMAND IMBALANCE: Of the 210K units, half will be in big metropolitan markets, which means the rents will be WHAT... unaffordable. Or maybe it's just simpler to say that of 210K, 80 percent will be high projects, many in big cities, which are out of reach for the average renter to afford?: That's a drop in the bucket compared to the total inventory of rental housing. Plus, roughly half of all the new units are being built in 10 big metropolitan areas. And nearly 80 percent of the new apartment construction projects boast amenities and higher-end finishes aimed at renters willing to pay a premium.

"You have this new supply that's being added at the very top, high-end of the marketplace, so far it's meeting with great demand, but then when you look throughout the spectrum of apartment rentals, there's very little new supply being added anywhere else, so that's why there's so much pressure on rents and very little choice for the average renter," Nadji said.

--MORE RENTERS COMING

Long-term U.S. population trends are expected to stoke more demand for apartments over the next few years.

A key factor is the roughly 1.6 million millennials that will come of age in the next five years. Already the number of young adults living with their parents remains above the long-term average. Many of those young adults will begin to move out on their own.

"This year it's a race between young adults forming new households and apartment supply coming onto the market," Kolko said. "Will that new supply be enough to keep up with that new demand and prevent rates from accelerating? That's the big question for this year."


Updated : 2021-09-21 06:44 GMT+08:00