Markets & EconomyRentals

5 reasons to love the apartment glut

Is it too much to expect for a marketplace shift that has yet to take place?

Future-Proof: Navigate Threats, Seize Opportunities at ICNY 2018 | Jan 22-26 at the Marriott Marquis, Times Square, New York

Drive by any commuter route or transit hub in any major metro today and chances are you’ll see forests of construction cranes building apartments. America is in the middle of the biggest apartment construction boom in 25 years — a boom so big that it will change the dynamics of real estate markets coast to coast.

Every trend has its end. The time has come for the cycle of falling vacancy rates and rising rents to give way due to the coming rental glut. Since 2006, some 2.9 million new apartment units have opened, and the National Association of Home Builders is forecasting that 719,000 more will be ready by the end of next year.

Add to that the 3.9 million homes that were converted to single-family rentals during the foreclosure floods of 2009-2012. That’s a total of 7.5 million additions to the nation’s rental stock. To put that number in perspective, existing sales this year are forecast to be 5.19 million.

The multifamily boom will increase capacity in most major markets so much that some data services report vacancy rates are falling already. Forecasters expect rent increases to follow suit and slow to the inflation rate or below. By 2017, CBRE expects vacancy rates to reach 5.3 percent, the highest level since 2011.

Empty apartments and declining rent increases might sound like bad news for homeownership. However, changes in relative rents and home prices don’t always have the results you might expect.

(For example, see my article, “How the rent trap is killing off first-time buyers.”) There are forces at work that make outcomes more complicated than a simple comparison of monthly housing costs for renters and owners.

Dominate your farm and amp your SEO with content marketing
Discover the power of content marketing for real estate agents READ MORE

The most important driver is the remarkable — even astounding — desire to become homeowners harbored by a consistent and dominant majority of millennials. For several years, Fannie Mae’s National Housing Survey has documented that the American dream is alive and well in young adults aged 18-34.

Most recently, the 2015 How Housing Matters survey released by the MacArthur Foundation found that 7 out of 10 renters want to own, and more than half of millennials rate homeownership a high priority — more than any other age group.

If survey after survey by groups as diverse as the Pew Center, Gallup and the National Association of Realtors report some 70 to 80 percent of millennial renters want to be homeowners, it’s probably true.

Consider how the coming apartment glut might actually make it easier for renters to make the leap to ownership.

1. Motivation to buy will increase further because the glut won’t stop rents from hitting new highs.

On a national average, rents have risen 14 percent since 2010. They’ll go up by 3.5 percent in 2015, 3.0 percent in 2016 and 2.7 percent in 2017, according to CBRE. At this point, no one is forecasting rents on a national average basis to decline.

Home prices are going up as well. The only way a renter can control his escalating housing costs is to become an owner. A renter who ends up still renting when rents peak is the biggest loser. Both rising rents and rising home prices are incentives to buy.

2. To improve vacancy rates, landlords will offer new tenants free rent, not lower rents to existing tenants.

One month’s free rent is a time-tested tactic to fill empty apartments. It helps to close the deal with new tenants without lowering rents, which keeps investors happy.

Free rent doesn’t do anything for existing tenants who have already signed annual leases with rent increases included. For renters who have paid escalating rents for the past two or three years, the glut might not save them a penny.

3. Rising home prices coupled with flattening rents could return thousands of single-family rentals to ownership.

Real estate investors love single-family rentals for two reasons: cash flow from rents and capital gains from appreciation.

For the nearly 4 million properties converted before 2012, appreciation has been great for their owners and low vacancy rates are keeping them rented — for now. They probably won’t do as well over the next few years. Both home prices and rents are forecasted to flatten, beginning next year.

In a national survey I supervised for a major player in the single-family rentals two years ago, two-thirds of investors said they planned to hold their properties for less than 10 years. Most bought during the foreclosure floods of 2010 and 2011.

With some 14 million single-family rentals in the national housing inventory — roughly 1 out of every 9 homes — the next four years might see that number decline for the first time in nearly a decade as investors cash out. They will return their rentals to ownership and replenish the badly depleted inventory for first-time buyers.

4. An end to big rent hikes and improving incomes will make it easier for renters to buy.

When you’re in your 20s or early 30s, two years can bring significant changes. In today’s improving economy, young workers are getting better jobs, promotions and raises. Higher incomes take care of many barriers to buying, including overcoming student loan debt, improving FICOs and saving for a down payment.

An end to surprise rent hikes that sap savings will help, too. Many millennials might move into new rentals temporarily to take advantage of teaser rents and free rent to make it easier to save. In about two years, the apartment glut will hit its peak. Draw a red circle around 2017.

5. Homeownership will become cool again.

Reasons 1 through 4 are mostly financial. Rising vacancy rates might trigger an attitudinal change as well.

As the pendulum shifts back to ownership, talk of a rentership society will diminish. Homeownership will regain its status as a sign of success, stability and maturity. The rental sector has enjoyed a nine-year run of breakneck growth and popularity.

The doubts that will be raised by a return to high vacancy rates could signal a shift in attitudes. As homeownership reinvents itself for a new generation, real estate markets will complete their return to robust health.

Is it too much to expect for a marketplace shift that has yet to take place? Perhaps, but change is indeed coming, and there are reasons to rejoice. Those who take a narrow view and wring their hands just because rent vs. buy calculations might change in some markets miss the forest for the trees.

Steve Cook is editor and co-publisher of Real Estate Economy Watch and provides communications consulting services to leading real estate organizations. Visit him on LinkedIn and Facebook.

Email Steve Cook.


Inman Connect San Francisco is right around the corner — register now and save $200!