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 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.
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 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 apartment in the San Francisco Bay area, where such housing
listed recently on Zillow.com 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."
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