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Rent jumps cool in hot markets, but for how long?

The median-rent growth in once-hot rental markets like Seattle and Portland, Oregon, has slowed considerably over the last two years, and rents are relatively flat or even declining compared to last year in a number of those markets, according to tracking firms.

What does this mean? According to analysts, likely this is just a temporary blip.

apartmentluxuryLong-term, the apartment and single-family rental sector is forecast to remain strong for years to come, with rents and occupancy rates staying stable due to favorable demographics, changing consumer tastes in favor of renting near urban centers and a tight residential housing market that has shut out many first-time homebuyers.

Short-term, though, there has been some angst for the multifamily owners and investors in a few major cities.

Nationwide, rent growth has slowed. Seattle-based Zillow, which tracks the median rental price of all rental-property types, including apartments and single-family rentals, is reporting that rents on a nationwide basis were unchanged in July, compared with the prior month, and rose just 50 basis points year over year.

In terms of apartments only, rents rose 3.1 percent on an annual basis in August, according to the tracking company Yardi Matrix. That’s still pretty solid annual rent growth, even by historical standards. According to Yardi, the August annual gain of 3.1 percent beat the eight-year average for annual rent growth for the nation of 2.4 percent.

But in a few cities rents have flatlined, and that slowdown has garnered attention. Bloomberg News, using Zillow’s data, last week featured prominently the case of Seattle, where numerous typically higher-end apartment buildings have been built in recent years. Rent growth in Seattle was essentially unchanged year-over-year in July, according to Zillow data. Seattle saw full-year rent gains of 8 percent in 2016, and 5 percent last year, according to Zillow. 

The Bloomberg article also cited examples of Seattle landlords granting rental perks to tenants, such as free parking and gift cards, to beat out the competition for tenants and secure leases in new, upper-scale urban buildings close to downtown.

This slowing pattern isn’t unique to Seattle. Yardi Matrix reported that 11 cities, including Seattle, had year-over-year apartment-rent growth of under 2 percent in August. Other major rental markets where renters have gained the upper hand include Washington, D.C.; Dallas; San Antonio; Baltimore; and Nashville, Tennessee.

On the other hand, many cities are still seeing strong gains in rental prices. Rent growth has beat the eight-year rent-growth average of 2.4 percent in 19 of the 30 cities tracked by Yardi Matrix. Also, in those cities where apartment rents are stagnating or declining, the slowdown has occurred in upper-end buildings with amenities. In some cities, an abundance of higher-end apartments are available, but there is a shortage of workforce housing.

According to Yardi, rents in upper-end properties declined in Nashville, San Antonio, Baltimore and Orange County, California. By contrast, none of the 30 American cities tracked by Yardi saw rents decline for workforce housing, the type built for people who are renting by necessity.

“The majority of the supply is in the top-end inventory,” said Doug Ressler, director of business intelligence for Yardi Matrix. “The majority of the demand is in the workforce, which is lacking supply.”

Ressler noted that evaluating rental trends can be tricky, and rental prices don’t present a full picture of the interplay between apartment supply and renter demand in a city. Some cities, like New York City and San Francisco, have rent controls in place that have kept rent growth artificially low. The local government can influence rental trends in other ways. For example, in Seattle, King County plans to donate land in north Seattle to a nonprofit that is planning to build hundreds of affordable-housing units near a future light-rail station.

“You have to take each market by market, and look at the different types of variables,” Ressler said.

A temporary slowdown 

In the case of Seattle, Ressler predicted the number of new apartment projects under construction would likely slow, but a robust pipeline of potential projects would remain in the planning phases. As for the temporary glut in higher-end, so-called lifestyle units in Seattle, he predicts the vacancies will eventually be soaked up by tenants.

“Salary and wage is big in Seattle; it is a lifestyle market, it is also Asia-Pacific rim,” Ressler said. “We see a lot of ethnic migration into Seattle, in terms of Asia-Pacific rim, non-native population growth — 80 percent of those are renters. That says [there is a need for] workforce [rentals], but it doesn’t necessarily say that people don’t take amenity-rich apartments too, and would say I want to live downtown in an amenity-rich apartment.”

Housing economists also told Scotsman Guide News that a general downturn in rents nationwide is unlikely, absent some major shock to the economy.

“In the multifamily segment, if you look back, they haven’t overbuilt the last two cycles,” said Sam Khater, chief economist for Freddie Mac. “I think they learned their lesson from the ‘80s. There are some markets where they came on in pretty big numbers: New York, Seattle, Austin (Texas), Denver, places like that. So, that is why you are seeing softer and softer growth [in rents]. I think this is sort of the natural maturation of the cycle, as you are reaching this later-stage cycle from an economic perspective.”

Khater also said that some millennials, who have reached homeownership age, are now buying homes, thereby temporarily weakening some demand for apartments.

National Association of Realtors Chief Economist Lawrence Yun also said he doesn’t see oversupply as a long-term problem for the rental market, in part because the housing market is still suffering from a shortage of affordable homes for sale.

“I don’t see the apartment rents remaining low for a long period,” Yun said. “First, the lower rent will be a signal to stop building apartments. And second, because some people who are already building, if [the rents are less], they will convert them into condominiums.” 


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