Rents Keep Rising Amid Strong Demand for Apartments

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
detail of modern building in...
ShutterstockEven with more buildings under construction, rents are higher.
By Alex Veiga

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

"I'm actually paying more than I really feel comfortable paying right now."

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 (an AOL Real Estate partner).

Rental Boom: 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

"We definitely see demand improving, especially the younger demographic coming out of college and being in their prime renter years."

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."

Jaswinder Bolina knows something about that. An assistant professor of English at a the University of Miami, Bolina couldn't afford to pay the roughly $2,000 rent for his two-bedroom, two-bath apartment in an upscale area of Miami and still save enough money for a 20 percent down payment on a condo. Ultimately, his parents pitched in, helping him buy a $340,000 condo that he expects to close on in May.

"It could have taken me 10 years to save enough for a down payment because property values have rebounded out here to the point where I'm priced out of the market," Bolina says.

Chasing Lower Rents: Rising rents in San Francisco compelled Marc Caswell to move to Los Angeles in September. He and his girlfriend couldn't get past the cost of renting a two-bedroom

Higher demand and rising rents, unwelcome as they are for tenants, will produce more income for owners such as apartment REITS.

apartment in the San Francisco Bay area, where such housing listed recently on for an average asking rent of $4,100 -- more than double what the couple hoped to pay.

"In a year or two, there would have been no money put away," says Caswell, who works for an environmental nonprofit. The couple, who earn a combined salary of about $120,000, now pay $2,000 a month for a two-bedroom apartment in Los Angeles, the 12th-most-expensive rental market last year.

Even with more buildings under construction, rising demand will push rents up in many markets. Reis expects a stronger job market to enable more people to start renting their own places instead of living with roommates or parents. As a result, the firm predicts that effective apartment rents will increase 3.3 percent this year to an average of $1,118 nationally.

Good for Investors: Higher demand and rising rents, unwelcome as they are for tenants, will produce more income for owners such as apartment REITS. These real estate investment trusts operate buildings they acquire or build.

Steadfast Income REIT, based in Irvine, Calif., is counting on rental growth and demand to continue rising in Texas, Illinois, Kentucky, Oklahoma and the seven other states where it's invested $1.6 billion to buy buildings with a total of about 16,000 units.

The company has avoided coastal markets, where apartment buildings for sale tend to command high prices, making it harder to turn a profit without charging rents that could price out many tenants. Steadfast likes to buy buildings where it can make money while serving tenants who earn between $45,000 and $75,000. On average, it charges $950 in rent, says Ella Neyland, Steadfast's president.

Steadfast has 40 percent of its holdings in Texas, where an energy boom is creating jobs faster than the national average. Those jobs are luring people to cities like San Antonio and Houston and driving up demand for rentals.

"Every single day I have some apartment home in my portfolio that's up for renewal," Neyland says. "As the market improves, I increase the rents."

Add a Comment

*0 / 3000 Character Maximum


Filter by:

This page is great thanks! but before renting an apartment go check this video! helped me tons making my decision!

February 03 2015 at 8:57 AM Report abuse rate up rate down Reply

The Cal State Companies: Center for Real Estate Studies • Cal State Properties • Cal State Investment LTD Partnership
PO Box 96 • Palos Verdes, CA 90274 • Phone 310-245-6952 • E-Mail

Media Contact: The Center for RE Studies For: Immediate Release

Just Released Fourth Quarter 2014
Leading Income Rental Markets

Palos Verdes, CA. The Center for Real Estate Studies (CRES) has just released their fourth quarter 2014 issue of “Market Cycles". It gives a forward look at more than 150 income rental markets with “buy and sell” recommendations.
The current number of markets in the “Sell Phase” is thirty-five, according to Eugene E. Vollucci, Director of CRES. The number of markets in the “Buy Phase” is nine. Mr. Vollucci states, “that this quarter the three top buy recommendations are Asheville, NC, Austin, TX and Toledo, OH. The three top sell recommendations are Columbus, OH, Honolulu, HI and Richmon, VA.”
“There’s a strong eagerness for rental units,” Mr. Vollucci says. “As long as the economy still is not performing at its best, there’s enough drive to stimulate significant growth of renter households. Because potential homebuyers are still not a major factor, the overall performance in the apartment demand continues to increase apartment occupancy across the nation’s 100 largest markets registered at 95.7 percent as of the third quarter.”
The apartment rent growth will continue to accelerate during 2015. Based on this year’s effective rents, new leases should show an annual rent growth of 3.9 percent
Looking forward, there is evidence that urban supply will continue to swell. Similar to 2014's track record, seven of the top 10 projected new-supply submarkets for 2015 are "urban core," according to Axiometrics (another is Brooklyn, N.Y.), and the markets at the top of the 2016 deliveries list are in New York City and San Francisco.

Hang on tight—optimistic projections that apartment markets can absorb high levels of new construction are going to be tested soon. Developers will start construction on 405,000 units of multifamily housing in 2015, according to the 2015 Dodge Construction Outlook. To fill all of these new units, they will need all of the increased demand that markets analysts are hoping for, as a healing economy helps young people now living with parents or roommates to form their own households.
The U.S. economy has created more than 200,000 new jobs a month for most of 2014. If the recovery continues, new household formation will support strong demand for multifamily housing of more than 400,000 units a year from 2015 to 2017, compared to the average of just 296,000 apartments completed annually from 2012 to 2014, according to data firm RCLCO, a real estate advisory firm.

“Demographics are supporting demand,” says Ryan Severino, senior economist with New York City based research firm, Reis Inc. “The most common age in the United States is 22, followed closely by 23, and then 21. There are many young people in the market that are predominantly renters and not homeowners. This will continue to provide significant demand

According to the Urban Land Institute, with home prices rising and people keen to be close to the urban core, some developers are discovering opportunities in purpose-built multiresidential development or redevelopment. Increasing location density, or adding a retail component to the mix, could prove key to making the economics work. Investors also are taking an interest in multiresidential properties, seeing them as a way to lock in income and potentially realize significant upside at the end of the term. Patience will be key: rent controls and other factors may put some limits on the returns that investors can expect, and “making the numbers work” is still project-specific. Rental projects may also require significant amounts of ongoing investment to keep the product quality at a level where it can compete with rental stock represented by newer condominiums.

ABOUT THE AUTHOR: Eugene E. Vollucci, is the Director of The Center for Real Estate Studies, a real estate research center He is author of four best selling books and many articles on rental income investing, income rentals, real estate, apartment investing and taxation. To purchase a subscription to Market Cycles and to learn more about the Center for Real Estate Studies, please visit us at

January 10 2015 at 5:57 PM Report abuse rate up rate down Reply