Apartment Deliveries Slow Rent Growth

Annual apartment rent appreciation slowed for the third consecutive month in October as more apartments came online, reported Zillow, Seattle.

Rents appreciated 4.5 percent year-over-year, down from 5.3 percent in September. But rent growth still exceeded historical norms and rents continue to rise faster than incomes, said Zillow Chief Economist Svenja Gudell.

“Rental appreciation has started to slow down in part due to more rental supply,” Gudell said. “Many of the bigger multifamily rental projects that were begun a couple years ago in cities nationwide are finally starting to open for occupancy, easing pressure on rents somewhat.”

Gudell said renters should not count on getting a bargain, though. “Make no mistake, despite this recent slowdown in rental appreciation, the rental affordability crisis we’ve been enduring for the past few years shows no signs of easing, especially as income growth remains weak,” she said. “It will take a lot more supply, and a lot more renters-turned-homeowners, to fully reverse this trend.”

Jay Parsons, director of analytics and forecasts with MPF Research, Carrolton, Texas, said despite rising rents and a fast-growing apartment stock, more than half of U.S. apartment renters with expiring leases in October renewed their leases. “For all the talk about affordability, there isn’t yet any real evidence that market-rate apartment renters are unable or unwilling to renew their leases,” he said. 

More than 50 percent of renters with expiring leases renewed in each of the past 22 months, MPF said. By comparison, renewal rates typically hovered in the mid- to upper 40s prior to 2010. Over the past 22 months, the average rent increase for a lease renewal was 4.7 percent, marginally higher than the mid-2000s norms.

“The problem isn’t rent growth in market-rate apartments,” Parsons said. “The problem is the lack of income-restricted rental units for households that couldn’t afford a market-rate apartment even prior to the recent run-up in rents.”

While U.S. apartment construction recently reached three-decade highs, most of the new deliveries are in high-end properties. “That means that even for the bulk of the households in market-rate apartments, it’s much cheaper to pay a 5.2 percent renewal rent hike than to move into a newly built property,” Parsons said.

Gudell noted that a widely expected December rate hike from the Federal Reserve could represent an additional incentive for current renters to enter the home-buying market while rates remain low. Reflecting this, home values grew at their fastest pace since in October in nearly a year, up 4.3 percent to a Zillow Home Value Index of $182,800.