Rents are Collapsing in Some of America's Biggest Cities

Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes

The Real Deal reports that rents are collapsing in some of America's biggest cities. The article does not specifically say this, but this is no doubt related to the fact that development has been concentrated for ten years in certain submarkets of certain cities, with the result that there is a glut of rentals on the market. The article focuses in particular in Chicago, which has the added headwind of decreasing population, though some people in the comments say that this is a "tale of two cities" issue, where population and rents are rising in certain parts of the city and declining in others.

Also, so far, rents continue to grow in smaller cities . . .

Here's the link.

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Anthony Dooley

Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes

@Rick M. You are a perfect example of knowing the market. This kind of knowledge should make you very wealthy as a real estate investor. So many on this site talk of investing in markets that they don't know, and that is my biggest advice to new investors. Know your local market so that you recognize a bargain when you see it.

To add to your insight, I notice that all of the new construction of multi-family is high-end and very expensive. This leaves a gaping opportunity for investors to focus on affordable housing for the average person. This means buying older complexes, renovating them, and renting them out based on median income affordability. This is a much larger market. When the downturn happens, it will affect the A+ and A class properties first.

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Antoine Martel
Rental Property Investor · Miami, FL · Member since 2017 · 2k+ posts · 911 votes
9y
Very interesting!
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
Jonathon I always chuckle when I see folks on BP talk about how rentals are immune from a economic downturn..
granted rents are still killer but they simply do not always go up.. and they CAN AND DO go down.
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Todd Dexheimer
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
9y
@Jay Hinrichs I think people look back at the last downturn and can see rents in most areas didn't move much. Economic vacancy went up, but rents stagnated and then climbed. This must mean that in a downturn, rents will not change, right? Well that was the case in 2008, but we also did not experience a big run up in rent prices. I think this time could be different.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Todd Dexheimer it was regional... rents certainly crashed in many parts of the country.. and in many parts just stayed the same especially section 8 areas were the govmit just chugged through .. really depended on where you were.
I had clients in PHX for instance whose rent went to zero on 4 plexs I mean all 4 units vacant :( there is just no absolute is all I am saying.
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Bruce Petersen
Rental Property Investor · Austin, TX · Member since 2017 · 254 posts · 265 votes
9y
Well said @Jay Hinrichs, seems at least once a month I have to remind someone of that very thing, rents DO go down.
Don't be lulled into a false sense of safety and make bad or reckless decisions knowing that you will NEVER have to lower rents. Need to stress test your underwriting, especially now with regard to many markets.
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Todd Dexheimer
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
9y
@Jay Hinrichs I was agreeing with you. By the way 4 units being vacant does not mean rents went to zero, that just means vacancy climbed and likely poor management. Looking at rents across the country in the last down turn, the large majority of markets had very little price drop. The biggest issue was economic vacancy (no pay tenants). This time could be very different as we are seeing rents push peoples living expenses extremely high.
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Rick M.
Rental Property Investor · Fort Lauderdale, FL · Member since 2017 · 151 posts · 94 votes
9y
I used to live in Chicago, its a high crime area in general. That's why rents are low in Chicago/or have fallen. The first comment says it all
"Chicago is losing population overall, but it's a huge City, and the neighborhoods that are adding apartments are growing rapidly in both population and jobs. The two primary factors for population loss in Chicago are people leaving the high crime areas, and gentrification of neighborhoods adjacent to popular neighborhoods as people get priced out of the hot area and decide that living a few blocks away with lower rents is worth it even if there aren't quite as many hip restaurants (yet). The most obvious examples of this are Wicker Park pushing into Humboldt Park, and Bucktown pushing first into Logan Square and now into Avondale. And Avondale is also getting gentrification pressure from West Lakeview. Other examples are the West Loop pushing into East Garfield Park, University Village pushing into East Pilsen, Chinatown pushing into Bridgeport and Hyde Park pushing into Woodlawn and Lincoln Square pushing into Albany Park.
In the seven or eight square miles that make up what the City calls Chicago's Central Area, population growth is as high or higher than any of the Sun Belt boomtowns as a percentage growth rate. Between the 2000 and 2020 censuses, the area will have more than doubled in population, growing from about 110,000 to over 230,000. Many of the other popular North Side areas will have also added population in that time. Growth there isn't enough to offset losses in high crime South and West Side neighborhoods, but it's definitely a "tale of two cities" scenario and not a story of unmitigated collapse for Chicago."
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Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
9y
@Rick M. You are a perfect example of knowing the market. This kind of knowledge should make you very wealthy as a real estate investor. So many on this site talk of investing in markets that they don't know, and that is my biggest advice to new investors. Know your local market so that you recognize a bargain when you see it.
To add to your insight, I notice that all of the new construction of multi-family is high-end and very expensive. This leaves a gaping opportunity for investors to focus on affordable housing for the average person. This means buying older complexes, renovating them, and renting them out based on median income affordability. This is a much larger market. When the downturn happens, it will affect the A+ and A class properties first.
12 Reply
David Fraser
Investor · Erin, Ontario · Member since 2017 · 12 posts · 1 vote
9y
Interesting article, thanks for sharing!
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Jeff G.Pro Member
Investor · Wethersfield, CT · Member since 2013 · 371 posts · 191 votes
9y
Rents can and do go down. Look at Flint, MI. Rents were growing until 1980. After 1980, rents fell off of a cliff. Rents in and near Flint, MI are still very close to what they were in the early 1990's. The rental income picture gets even worse when you account for the spending power the dollar has lost over the past 30 years through inflation.
So, now only did rents collapse. In 30 plus years they've never recovered and any "increase" is far out paced by inflation. Some rental markets are just... done.
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Irina Belkofer
Real Estate Broker · Cleveland, OH · Member since 2017 · 719 posts · 658 votes
9y
Originally posted by @Anthony Dooley:

@Rick M. You are a perfect example of knowing the market. This kind of knowledge should make you very wealthy as a real estate investor. So many on this site talk of investing in markets that they don't know, and that is my biggest advice to new investors. Know your local market so that you recognize a bargain when you see it.
To add to your insight, I notice that all of the new construction of multi-family is high-end and very expensive. This leaves a gaping opportunity for investors to focus on affordable housing for the average person. This means buying older complexes, renovating them, and renting them out based on median income affordability. This is a much larger market. When the downturn happens, it will affect the A+ and A class properties first.
Can't agree more!
Invest in what you know and know what you're investing in! Precious words.
I've seen so many people playing this game without even knowing what they're getting into.
Each local market differ so much even within few miles - it takes hands on knowledge to buy smart: location, location and location.
I admire brave people and hope they have the cushion in case of losses
1 Reply
Ian WalshBusiness Member
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
9y
New construction rentals in our market are over saturated. Rent is not collapsing but prices are softening. Big difference.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
Class A is generally over built for a reason. If someone is paying 3,000 a month rent but making 300,000 a year their rent to income ratio is still low.
If someone is making 40k a year but paying 1,200 a month in rent that ratio is much higher. Any little blip to that tenants life is amplified as there is little to no room for error.
Additionally high land and construction costs the new development makes sense with higher rents. The project does not usually pencil with low income or affordable type housing unless there is a very,very high density allowed on the site with the lower than premium rents.
I saw this back in 2007,2008. Lot's of developers built this big stuff and it was a game of musical chairs. The ones that built early on most made a killing. The ones in the middle of the cycle completed and leased up to do fairly well. The ones at the end of the cycle struggled to finish from over building or never completed mid project and lost everything if they could not hold the fractured project until the next upturn.
A lot of areas there is great demand for affordable housing but most of the areas does not want it there. I can tell you in the strong suburbs where I live almost nobody wants affordable housing. On the zoning hearings thousands of people show up to protest. Residents say it will lead to crime and transient type renters bringing down house values and the quality of the area. National average median income is about 54,000 and my area is about 120,000.
What does get approved generally or seen as positive is higher end seniors housing projects.
I tend to agree that affordable housing new development does not pencil to make a profit unless you are getting a bunch of help from the city,county,state, or federal governments with programs or grants. One poster mentioned taking old buildings for less than replacement cost and doing affordable housing with rehab. That might be one of the few ways the project still pencils as new development would prove to costly in many markets today for the anticipated rent rates received.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
Forgot to mention I would not personally be building ground up multifamily right now. Larger projects can take years to complete and lease up and it's late in the cycle now. Lenders are pulling back on development type loans for multifamily and lowering the loan amounts and increasing the down payments to where it presents a real downside risk to the developer.
Everything is a risk versus reward and when the risk can be too great for minimal or average upside then ground up development does not make sense.
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Robert C.
Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes
9y
@Jonathan Twombly, Since it lists SF, I'll just comment that "collapsing" is a rather dramatic word for the bay area. "Softening" is probably more accurate. It's really the white collar end of the market that's coming down because of all the new construction condos that are coming online. Seasonality is back in play, too. Renting during the fall/holiday season might give you more trouble, but it heats up again spring/summer.
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John CasmonPro Member
Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
9y
Collapsing is a bit over the top for Chicago as well, though it is a serious matter to monitor. At a macro level the city and DMA continues to lose population due to the city's financial issues and a lack of job growth. The growth that is happening is centered in the downtown and central regions which is where the Class A new construction has been focused. In fact, there are 33 active, tower cranes right now, which is more than any other city. The fact that all this construction is happening while population is declining is having an adverse impact on existing rentals outside of the central region and we're seeing rents start to soften.
1 Reply
David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
9y
I wish the article had gone into more detail about which portions of the market are doing what.
One could envision a scenario where a combination of factors could be contributing to an overall reduction. Some factors might include which economic segments are seeing the biggest exodus, which are seeing the biggest loss of both income and employment, etc.
Yes, "Collapsing" may be a bit strong. "Changing" may be a better word, with regard to Chicago.
My $0.02 ...
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Ryan J. Shope
Rental Property Investor · Bellevue, WA · Member since 2017 · 33 posts · 11 votes
9y
Thanks for the article, Jon!
0 Reply
Edward C.
Investor · Palisades Park, NJ · Member since 2017 · 46 posts · 14 votes
9y
Thank you for the link.
I think now may be a time to tread cautiously and only swing at the really "fat pitches".
One could argue that the shear interest in RE investing as evidenced by the activity on this website is an indicator that we very much late in the current cycle.
I'm not suggesting folks sell everything and run for the hills. I'd say now is a time to prune the portfolio and have some cash ready to be deployed.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
I like the baseball analogy.
Imagine the bottom of a cycle you have a bat and a dodge ball to hit. Then as the cycle starts to recover the bat stays the same but the object to hit gets smaller and smaller such as a baseball and now a bounce ball.
The chances to strike out are greater.
I am looking to do deals now in commercial but only if it makes great sense. A project where the stars have to align and the heavens open up I do not even think about pursuing.
I know this. I have taken too many calls over the years where others underestimated numbers and the project took too long and they took a big hit.
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Edward C.
Investor · Palisades Park, NJ · Member since 2017 · 46 posts · 14 votes
9y
@Joel Owens i was quoting warren buffett, but your analogy really took it to another level. thanks for that. hopefully okay if i share liberally with others that i come across. thanks again.
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Ítalo Mendonça
Investor · New York City, NY · Member since 2016 · 13 posts · 7 votes
9y
My two cents - as some posts have pointed out, to say that rents are 'collapsing' is a bit of a stretch, but we need to keep in mind that in the age of peak attention, a headline like that yields a lot more clicks than 'Rent growth may be slowing down/softening'.
But not only that, the slowdown in rent prices becomes a story due to the perceived asymmetry in the nature of rent prices: not only landlords and investors, but tenants also tend to assume that rent will always go up. To illustrate - I live in a large apartment building in NYC, where the high-end and luxury sectors are massively overbuilt. A brand new building with 70,000 sqft in amenities just went up in front of mine. And yet, my building tried to raise my rent by ~10% this year! In a falling market! Why? Because, if for nothing else, the average renter is not carefully watching the macro trends in housing and the real estate market. If 25% of the tenants sign on the dotted line because they complacently assume/accept that rents tend to go higher, that's huge for the building's bottom line. Why wouldn't the leasing company try it? It's a free option for them.
In much the same way, a car owner doesn't show up at the gas station waving a chart of crude oil and yelling 'gas should be cheaper!!!'. The gas station owner only lowers his prices when his competitor across the street capitulates and lowers his first - the downward movement in prices is driven by the supply side, not by the demand side, and therefore the nature of these prices will tend to be 'stickier' and less noticeable during a downturn, although like some have pointed out above, it's certainly not immune to the basic laws of supply and demand. The impression that rents don't move lower is owed much more to the incentive that landlords and owners, as a class, have to loosely act in cartel-like fashion and 'squeeze' the renter even if the market is moving a little bit against them, than anything else.
Interested to hear you guys' thoughts.
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Bettina F.
Investor · Post Falls, ID · Member since 2016 · 606 posts · 699 votes
9y
We are not experiencing a downturn in my market. Lots of big new complexes are being built. I used to worry about the competition, but instead, I think the new complexes may be "pulling" my class B rents upward.
We own smaller, older, remodeled, attractive and clean class B apartments. We do not have the amenities of the new complexes, but also do not have the high fixed costs. We are very profitable with rents $100 to $150 a month less than the new complexes. We rarely have turnover. We screen well and have been fortunate to get the cream of the crop of blue collar tenants.
When I drive past the new developments at night, I notice they appear to be only 30% occupied. Apartments are rarely lit and the parking lots have many vacant spaces. I think the crash will hit the mega-complexes first, and many REITs will be losing money.
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Jeff Burdick
Investor · Chicago, IL · Member since 2016 · 515 posts · 247 votes
9y
Originally posted by @Rick M.:

I used to live in Chicago, its a high crime area in general. That's why rents are low in Chicago/or have fallen. The first comment says it all
"Chicago is losing population overall, but it's a huge City, and the neighborhoods that are adding apartments are growing rapidly in both population and jobs. The two primary factors for population loss in Chicago are people leaving the high crime areas, and gentrification of neighborhoods adjacent to popular neighborhoods as people get priced out of the hot area and decide that living a few blocks away with lower rents is worth it even if there aren't quite as many hip restaurants (yet). The most obvious examples of this are Wicker Park pushing into Humboldt Park, and Bucktown pushing first into Logan Square and now into Avondale. And Avondale is also getting gentrification pressure from West Lakeview. Other examples are the West Loop pushing into East Garfield Park, University Village pushing into East Pilsen, Chinatown pushing into Bridgeport and Hyde Park pushing into Woodlawn and Lincoln Square pushing into Albany Park.
In the seven or eight square miles that make up what the City calls Chicago's Central Area, population growth is as high or higher than any of the Sun Belt boomtowns as a percentage growth rate. Between the 2000 and 2020 censuses, the area will have more than doubled in population, growing from about 110,000 to over 230,000. Many of the other popular North Side areas will have also added population in that time. Growth there isn't enough to offset losses in high crime South and West Side neighborhoods, but it's definitely a "tale of two cities" scenario and not a story of unmitigated collapse for Chicago."
Outstanding post. I would also add that Ravenswood and Andersonville are pushing into Uptown and Edgewater, North Center is pushing into Irving Park, South Loop is pushing into Bronzeville.

Chicago's demographics are changing. Some people will point to Chicago "losing population"(which is really a minuscule percent if you break it down) and overreact and make blanket statements that say that Chicago is a poor place to invest. But if you really know your geography and follow the path of progress, there are many opportunities in the city.
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