Markets & EconomyRentals

Rise of the renter-by-choice fuels market confidence

Improved renter credit quality shows market is headed in right direction

The rental industry seems to be reaping the benefits of Americans’ decision to opt out of the homebuying process — at least for now. Some would-be-qualified buyers, especially young individuals in their 20s, are choosing to rent in many parts of the country.

And according to the CoreLogic SafeRent Renter Application Risk (RAR) Index, the credit quality of renters has improved on a year-over-year basis in the first quarter of 2015 proving that the financial stability of Americans is headed in the right direction.

“I think that this kind of trend has really been going on since the ‘Great Recession,’ where people who are certainly capable of buying have chosen to rent instead,” said Steve Deaton, of Deaton Investment Real Estate Inc. based out of Raleigh, North Carolina. “The renter-by-choice, from what I’ve seen, is the person in their 20s or 30s, likely single, who just doesn’t want to settle down. Perhaps their next job will be in another city.”

As the U.S. population grows, homeownership rates are remaining lower, as are rental vacancy rates. According to the RAR Index, trends show that the lowest vacancy rates for rental properties are in the West at 5.3 percent, followed by the Northeast at 5.4 percent. The Midwest and South have seen fairly high vacancy rates at 7.8 percent and 8.8 percent, respectively.

But in areas that are seeing a low vacancy rate, such as Raleigh, the rental market is competitive.

Having been in the business for roughly 30 years, Deaton has witnessed trends come and go, but the current conditions of the market have been somewhat stable since 2008/09. Deaton doesn’t see anything shifting drastically from current conditions anytime soon.

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“It’s the urban trend; I mean everyone is going downtown. Suburban construction, although it’s still there, [is] not as big of a deal as all the urban redevelopment that’s going on.”

Because the rental market wasn’t deeply influenced by the lending issues that fueled the recession, it has bounced back and been strengthening for several years now. Vacancy rates began to fall in 2010, and rental costs started to climb in 2011. In addition to that, according to the Joint Center for Housing Studies of Harvard University, construction activity among the multifamily sector grew 54 percent in 2011.

“There’s a lot of new construction to ease the issue of availability because there hasn’t been a lot of quality product in our downtown for people to occupy,” Deaton said. “There were a lot of older properties. And there were a couple condo projects that didn’t fly, that were caught by the recession that turned into rental product.”

“So that began to attract people. As soon as they began to recognize the demand for that high-quality, condo-style living for renters, people started saying, ‘Forget building condos, we should build apartment properties with the same type of amenities,’ and that’s what really started the trend in Raleigh in terms of construction.”

Average rent prices are climbing in many parts of the country, due in part to the influx of high-end construction. Large apartment complexes with what is deemed as “luxury apartments” are equipped with outdoor pools, exercise rooms, dog runs, movie theaters and more. These condo-like developments are bridging the gap between the homebuyer and the renter who can likely afford a home but doesn’t want the lifestyle of owning a property.

And it’s not all the millennial generation who is adding fuel to the fire.

“Baby boomers who are now empty nesters have sold their house to move downtown where they can walk to restaurants and shops right there,” Deaton said. “So there has been some of that, certainly to a lesser degree of demand than the younger crowd, and properties have to be of the highest quality.”

Deaton expects in the coming years to see more of a shift back to the average levels of homeownership. For now, tenants with better credit quality are creating a more competitive rental market in which landlords are able to boost prices and have their pick of the ideal tenant for their property.

Email Kimberly Manning.