Could the Rental Market Lose its Mojo?

June 27, 2016

High demand among young professionals has pushed rents in cities to new highs over the last five years. Rents have jumped about 20 percent nationwide in that time period. But some housing experts believe the rental market may be showing some signs of cooling. 

Most of that cooling is due to a surge in new supply in key markets. For example, major markets like New York, San Francisco, Seattle, and Boston are starting to see slower increases in rents. 

Overall, annual rent growth for high-end urban apartments has slowed from its peak in 2011 of nearly 8 percent to about 3 percent, according to MPF Research, a firm that tracks the multifamily sector. Multifamily permits in urban areas climbed 39 percent in 2015 compared to a year earlier, which means plenty of new supply is entering many markets, according to Zelman & Associates data. 

New York is expected to see 2.6 times more apartments in the next year than its historical average. Boston is to see 2.5 times and Philadelphia is expected for double its usually supply too. 

“When a number of new buildings compete to attract renters in a neighborhood, developers often offer generous concessions to help lure them, such as one or two months of free rent,” The Wall Street Journal reports. “That forces owners of existing buildings to lower rents or risk losing tenants, placing downward pressure on rents across the market.”

Major landlords, such as Equity Residential and Essex Property Trust, are lowering their expectations for revenue growth this year. Still, while economists are predicting a gradual slowdown in the sector, they aren’t predicting any crash. 

“The demand to live in these high-density urban markets remains very strong from both millennials and aging baby boomers,” David Neithercut, president and chief executive of Equity Residential, told The Wall Street Journal. “This gives us great confidence that we are right where we want to be for the long term.”

Source: “Rents Are Booming, But for How Long?” The Wall Street Journal (June 21, 2016)