With single family rentals soaring, especially in high foreclosure markets, home sales showing signs of life, and more multifamily construction coming on line every day, it doesn’t seem possible that vacancy rates could continue to decline and rents continue to rise.
But they are.
The commercial real estate research firm Reis reported last week that the apartment vacancy rate fell to 4.7% in the second quarter from 4.9% in the first quarter of the year. It’s the tightest rental market for apartments since the fourth quarter of 2001.
Asking rents jumped to $1,091 per month, 1 percent higher than the first quarter and the biggest increase since the third quarter of 2007. Excluding concessions designed to lure tenants, like months of free rent, the average effective rent rose 1.3 percent to $1,041.
Only two states, Rhode Island and Tennessee, respectively, posted quarterly effective rent increases of 0.7 percent, the smallest quarterly rise of the 82 areas tracked by Reis. No area posted a decline. On an annual basis, effective rents rose by at least 2.2 percent nationwide.
How long rents continue to rise at this pace? Apartment dwellers have been facing higher rents since late 2009 but the pace of increase has actually been picking up steam over the past three quarters. In the first quarter, effective rents increased in 75 of the 82 markets Reis tracks, to an average $991 a month from $967 a year earlier and $986 in the fourth quarter, or an increase of less than half a percent. Landlords’ asking rents also climbed, to $1,047 from $1,027 a year earlier and $1,043 in the previous quarter.
Multifamily construction is projected to slow down in terms of new starts in the coming years. In 2011, multifamily starts were up 56 percent. By the end of 2012, it is expected to grow 27 percent more. But in 2013, David Crowe of the National Association of Home Builders, is expecting new starts to rise by only 6 percent, at 238,000 new starts. “We’ll still see an increase but it won’t be quite as dramatic, as we begin to catch up with the backlog needed to fill the rental demand,” said Crowe.
Forecasting the single family rental segment is much more difficult. Little timely data exists, even on a local market basis, that track single family rentals. Certainly, in heavy foreclosure markets like Phoenix and Las Vegas, single family units are more prevalent than multifamily, but investors are buying and holding properties to rent in markets ranging from Chicago to Beverly Hills. In fact, single family rentals now exceed multifamily on a national basis. Some builders, stymied by the for sale market, are building single family homes for rental. As lenders adopt REO-to-rental strategies like the one that Bank of America is piloting to remove large numbers of foreclosures from the marketplace, even single family may quickly become even more dominant.
One thing is certain. At some point local rental demand will be met and vacancy rates will change direction. Hopefully when that occurs, the for sale market will become more attractive and more accessible to consumers, raising home values and creating opportunities for long term capital gains for investors who took a chance when prices were at their lowest.