A Coming Slowdown In The Ability Of Landlords To Raise Rents?

Landlords will not be able to keep increasing rental rates, according to several market forecasters, as rents have peaked in many markets and there are thousands of new apartment units coming on the market later this fall.

Reis reports, “We see our forecasts for 2016 and 2017 reflecting the gradual slowdown in the ability of landlords to raise rents over the next five years, as vacancies increase.”

  • Denver: The Denver market with rents averaging $1,400 a month in June, has peaked and will not continue to rise at the levels of the past year and becoming more in line with national rates, reports Bisnow.com. “Rent growth won’t return to where it was a year ago and will likely stay in the vicinity of the national rate,” Axiometrics VP of research Stephanie McCleskey told Bisnow.com. That's because market fundamentals, while still strong, are aligning to keep a lid on extreme rent growth. “Job growth in Denver remains strong, but a lot of new units are scheduled for delivery in the second half of the year,” McCleskey told Bisnow.com.
  • Atlanta: The Atlanta market hit average rents of $1,100 for the first time, according to Axiometrics. “Average rent has increased for eight straight months, and this market avoided the sharp rent decreases much of the nation experienced late last year. Job growth is still robust, and the demand should be able to absorb most of the large amount of new supply coming to market this year. Atlanta employers added 69,400 jobs in the 12 months ending in June, a slower pace than earlier this year with a cycle-high 10,246 new units expected to come market this year and another 9,644 identified for 2017 completion,” Axiometrics said in the report.

Strong rent growth continues in some areas

strong growth of rents continues in some markets

The strongest rent growth continues in the West and the South, according to AppFolio.

  • “As has been the case in the past few years, the steepest climbs continue to be seen in the West and South, with Sacramento, Calif., emerging as the top market for average rent growth so far this year, at 11%, and Portland, Ore., a close second at 10.2% — though the averages there are expected to fall to 6.9% and 5.9%, respectively, by the end of the year,” according to AppFolio.

"It's very geographic-dependent," AppFolio's vice president of product, Nat Kunes, told Investors Business Daily. "There are definitely cities that will see a rise. Some cities are starting to see a stabilization. They might be at near-peaks … in percentage growth, maybe." Even going back to the time before the Great Recession, according to Kunes, rent growth usually hovered between 2% and 4%. "We're seeing a lot of cities blowing that out of the water."

The bull market in raising rents is not over

Growth in rents may have peaked

“After three consecutive quarters of increases, the national vacancy rate remained stuck at 4.5% in the second quarter. While that sounds like good news, the reality is that vacancies actually did rise by around 9 basis points, but our custom of rounding to the first decimal place doesn’t show that,” Victor Calanog writes for Reis.com. “We are expecting vacancies to tick up by another 30 basis points by the end of this year as the bulk of new deliveries comes online in the second half, but note that this doesn’t mean a tragic end to the great multifamily bull run. If anything, having vacancies remain somewhat low despite the onslaught of new supply suggests that demand for the product remains strong.”

The growth in rents may have peaked

“We see our forecasts for 2016 and 2017 reflecting the gradual slowdown in the ability of landlords to raise rents over the next five years, as vacancies increase,” he writes in his report for Reis. “Even now we are seeing developers put the brakes on certain projects, waiting and seeing how new buildings lease up before proceeding. We therefore expect a little more caution from lenders and other market participants.”

 

Resources:

2016 apartment trends

Investors Business Daily on apartments

Apartment trends: What is happening in your city?

Axiometrics data

Find out how growth in rents may have peaked and more in our weekly newsletter