Do Sky-High Rents & a Hypersupply of Apartments Spell Real Estate Disaster?


More and more across the U.S., it pays to be an apartment landlord. Recent reports show the national average apartment rent at $1,211/month, representing a 5% year-over-year increase, and rents are spiking dramatically, especially in “hot” cities, such as Denver, Portland, Oakland and San Jose.

While some experts believe that aggressively rising rents spell impending disaster due to an increasing hypersupply of new development, statistics have yet to indicate a backlash against sky-high rates. Rather, the average occupancy rate in the second quarter remained at “full occupancy” levels of 95.2% nationwide.

Says Stephanie McClesky, VP of Axiometrics, “We’ve had a lot of new supply come on the market, and we thought rents would begin to decelerate. But the apartment market has remained strong, which is exciting for us but probably not too exciting for residents.”

Related: How to Profit From a Hot Real Estate Market (Even if it’s a Bubble)

Big Profits for Landlords, Big Expenses for Renters

Big landlording companies across the country continue to enjoy large profits from increased monthly rents, and the trend of massive development doesn’t show signs of slowing down any time soon. About 217,500 new units were added to the U.S. market in 2014, and it’s predicted that 2015 will see some 277,200 more.

Those standing to profit big include some of the country’s largest apartment owners, such as Chicago-based Equity Residential, which reported that funds from operations (FFO) of 79 cents per share marked an increase of 11.2% over the prior year, and AvalonBay Communities of Arlington, VA, which reported FFO of $1.88 per share, a year-over-year hike of 14.6%.

On the other side of the coin, renters are often straining financially to pay each month, sometimes foregoing dentist or doctor’s appointments just to write the rent check. Currently, renters spend an average of 30% of their income on rent each month — up from 25% about a generation ago — with some forking out 50% of their paycheck for rent in high cost cities such as San Francisco, New York and Miami.

Is It Sustainable?

Despite high occupancy rates, many experts suggest that over 30 U.S. markets, including Denver, Austin, Dallas, New York and St. Louis, have already entered into the “hypersupply” phase of the real estate cycle — a slowing phase of the cycle marked by large amounts of construction, a decline in occupancy and decreasing rents. Does that mean we should brace for a recession?

Related: The Real Estate Market: How to Analyze and Predict Cycles

Not necessarily, says Glenn Mueller, a professor University of Denver’s Franklin L. Burns School of Real Estate and Construction Management, who suggests: “If developers can slow the rate of supply, I think the market can go into a hypersupply phase and then return to a growth phase.”

Still, it’s hard to deny that as rents continue to surpass affordability, buying becomes a more and more enticing option. Zillow estimates that the average mortgage payment represents around 15% of income, a far smaller percentage than the average rent payment. In part due to hyper-expensive rents, the annual pace of homes sales in May exceeded 5.3 million on a seasonally adjusted basis, a year-over-year increase of 9.2% and the highest level since May 2009, according to the National Association of Realtors.

Despite a still-recovering job market, widespread student debt, and climbing interest rates, experts still predict continued increases in first-time home buyers entering the market. In a survey conducted across 20 U.S. metro markets, 5.2 million renters responded that they’d like to buy a house within the year, a number that has risen by a million from 2014. And with skyrocketing rents showing few signs of slowing, they might not be able to afford not to buy.

Investors: What kind of rent hikes are you seeing in YOUR area?

Leave a comment, and let’s talk.

About Author

Allison Leung

A career writer, editor and blogger, Allison serves as the Lead Editor and Community Manager for In the past, she has channeled her passion and curiosity for all things real estate into her jobs by working in real estate law and heading a blog about real estate market trends. Don’t ask about her dog, Ace, unless you want to see approximately 500 photos of his (adorable) face.


  1. Roy N.


    Interesting article. I’ve been having similar thoughts & concerns of the apartment markets in Canada. If you look north, many {sub}markets in Canada have been teetering on the {far side of the} edge of hypersupply for some time. Some have even crossed over, yet the brunt of repercussions has not caught-up with them. We are even starting to see oversupply, with further inventory in development, in smaller markets.

    Rents have held strong despite the conditions which is puzzling. In some locations it could be attributed to the cost of home ownership greatly outpacing an growth in family income – current national average for housing prices is 5.7 times family income. Some places are even higher: Toronto are over 7 and Vancouver has entered the realm of Singapore and Hong Kong with the average house price being 11 times family income. Canada has had the recent distinction of appear near the top of a few lists of countries with least affordable housing.

    While there is a large, captive renter population in many of these places, at some point you would think they would have ample choice of rental units – due to the oversupply – which would put downward pressure on rent.

  2. Kevin Fitterer

    Great article, Brandon. I was just thinking about this yesterday as I live in New York City and every direction I looked had a new high rise apartment/condo being built. As I tried to look for opportunities in the market the numbers just didn’t add up so I tried invested back in my hometown in the Midwest which I feel like is also in the expansion entering hypersuppy phase. It scared me for a bit but an important thing I realized that I hope others grasp is that any long term investing will experience booms and busts. This is where investors are a bit different from personal homeowners in my opinion. A downturn becomes an opportunity as opposed to a burden (to a degree and assuming the market cycle continues). The wealth and property values regenerate so long as time is on your side.

  3. Lynn Harrison

    I think the numbers are skewed in places like Vancouver, parts of LA, Stanford and NYC etc etc. A lot of the luxury apartments being built are bought as investments but not rented out. A google search will bring out more information for those interested. What is not talked about as often is some money is invested through a US citizen – which is not counted as foreign investment.

    A lot of capital has been leaving many countries around the world and some of the money is parked in RE. Estimates are $1.8 to $3.8 trillion of underground money has left China alone in the past 10 years with a drastic increase in the last 5. Not to mention Russia, Bulgaria etc. A home that is an investment may very well be presently counted as a rental even if it is not rented out- it just depends on who runs the numbers and how they are run. The US is very popular.

    I believe this is the wild card. It may increase or decrease now that the Chinese stock market has had problems.

  4. Scott Trench

    Allison – this was an amazing and incredibly well-written article. As usual, your sources and information are excellent, and you definitely give me some pause in continuing to rush into more and more real estate investments.

    It’s so hard to predict how this will impact investors. While you are right that rising rents might push more people to buy that too may be good for landlords – at least those of us that own small multifamily or SFRs – as equity will rise with rising home prices.

  5. The danger with averages is that the correct length of time has to be selected but first some thought should be given to whether the average is a cause or just a symptom. Any group of numbers can be averaged but it doesn’t necessarily have any predictive power, especially if there’s another factor driving the numbers… like demographics. Demographics is destiny and looking at long term charts of new unit completions going back to the 1970s shows that they roughly follow the rise of the baby boom, taper off until Gen X starts to rent and then falls again waiting for the Millennials to arrive at the leasing office (or the leasing app). The latest generation of renters were delayed by the Great Recession but they’ve been moving out of the parents basement and unbundling from their roommates since 2011/12.

    See my BP blog post here for a long term chart of apartment starts and completions:

    Looking at the second chart there you can see that the prime renting cohort (ages 18-34) will continue to grow through 2035. When the social and lifestyle changes taking place are layered on top of the demographics it’s easy to see why demand has been absorbing all the new supply. In fact we have research showing that actual demand for new units could be running as high at 500k per year.

    In addition to the continuing demand for apartments there was a hole in the supply during the recession where based on the 30 year average more than 500k new units were not built. That is the area inside the Vee on the first chart that runs from about mid-2009 through mid-2015. Granted that’s using an average and it’s difficult to say how units would have been built if there was no recession but bottom line is we’re not in danger of overbuilding yet, at least on a national basis. Certainly one could argue that different markets around the country are getting more that sustainable new supply but only in hindsight will we know for sure.

    As for the cycle I have written that because of the demographic and social changes as well as the slow pace of the recovery combined with the market interventions by the Fed we could have an extended peak this time around (See here for the chart and article: ).

    Dr. Mueller’s theory that real estate can back up in a cycle is counter-intuitive at best. A cycle that backs up isn’t a cycle at all by definition and it defies Mueller’s own explanation of what causes real estate cycles in the first place (The short version of which can be found on each edition of his quarterly ‘Cycle Monitor’ report: “Real estate markets are cyclical due to the lagged relationship between demand and supply for physical space.”)

    How long rents can continue to grow at current rates is another question because residents only make so much money and therefore can only afford to put a portion of what they make towards rent. However, in markets with growing employment, especially in the high paying sectors we’re seeing that rents continue to climb and anecdotal evidence shows that in those markets blue collar or service industry residents are bundling up again or moving further out to be able to afford rent.

  6. Johari Hughes

    Thank you Allison. This was a very interesting issue. I don’t fear too many will buy, because I think too many are scared and don’t believe they can or have enough stability to. But, definately appreciate the insight and nonetheless, I will monitor this as a precaution as I enter my Oakland, CA multifamily market.

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