Landlords boosted apartment rents to record levels in the second quarter as demand from tenants sitting out the home-buying market pushed vacancy rates to their lowest point in more than a decade, according to a report to be released Thursday.
Despite the sluggish economy, average rents increased in all 82 markets tracked by Reis Inc., REIS -0.53%a real estate data firm. Average rents are now at record levels in 74 of those markets and now top $1,000 a month on average in 27 of them, including Miami, Seattle, San Diego, Chicago and Baltimore.
The biggest rent boost of the second quarter was in New York City, where the average rose to $2,935 per month, up 1.7% from the first quarter. Apartment rents also increased in markets that have been hard hit by the economic downturn such as Las Vegas and Phoenix, where they rose 0.9% and 1% respectively in the second quarter. The lowest average rent among the markets surveyed was Wichita, Kan., where the average was $510 a month.
“The market is in a very tight position,” Reis said in a research report. “There is a paucity of available units.”
The nation’s vacancy rate fell during the quarter to 4.7%, its lowest level since the end of 2001, Reis said. That’s down from 4.9% in the first quarter of this year and from 8% in 2009, when millions of would-be renters were doubling up or living with family.
With the economy slowly recovering, more people are looking for their own places. But many are opting to rent rather than buy due to tighter lending standards—including higher down payments—and because of concerns about job security.
Market psychology also has shifted greatly from the boom years, when buyers were concerned that prices would rise if they didn’t move fast. Today prices are stagnating—or even falling in some markets—so buyers are asking: what’s the hurry?
“I’m just not ready for those roots yet,” said Tiffanie Salisbury, who is looking for a rental in Atlantic Highlands, NJ., hoping to pay about $1,100 a month. “I’m 31, and I don’t know where life’s going to take me.”
Reis said that this is only the third quarter in over three decades that the vacancy rate has been below 5%. When vacancies fall to this level, landlords typically accelerate rent increases “and that is exactly what is transpiring,” the Reis report states.
And it’s not likely to stop soon. Rents could “spike as landlords perceive that tight market conditions afford them greater pricing power over tenants,” Reis said.
Values of apartment buildings are soaring, contrasting sharply with the single-family housing market. In some cities, investors are now surpassing peak prices for rental property buildings. “We continue to be optimistic in both the near and long term for apartments,” said Scott Anderson, senior director of global real-estate asset management with TIAA-CREF, which spent $800 million on apartments last year and could spend more this year. “All of the underlying demand drivers are positive. The supply and demand equilibrium is in a good place. Rents are moving in the right direction.”
Analysts point out that the apartment sector may lose steam if the economy weakens further and tenants begin doubling up again or put up more resistance to rent hikes.
Demand for rental apartments also may fall if some builders succeed with appeals to move renters into the market for single family homes. Home builders have begun marketing to renters: PulteGroup Inc., PHM -1.53%one of the nation’s largest publicly held builders, recently introduced a line of homes marketed as being more affordable than some monthly rents.
Another risk: construction. Developers are racing to deliver new apartment supply, particularly in hot markets including Washington, D.C, and Seattle. Zelman & Associates expects 235,000 units to be started this year, followed by 285,000 in 2013and 320,000 in 2014.
Should too many units flood the market, landlords could be forced to offer concessions to fill units, such as free rent or a flat-screen televisions. Construction is “a wild card, definitely,” says Luis Mejia, the CoStar Group’s director of multifamily research.
A version of this article appeared July 5, 2012, on page A3 in the U.S. edition of The Wall Street Journal, with the headline: Rents Increase as Vacancies Dry Up.
By DAWN WOTAPKA July 5, 2012, 12:35 a.m. ET