Demand pushing apartment rents up

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.

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 Apartment List, a rental housing website, which used inflation-adjusted figures.

“That’s what we call the affordability gap,” said John Kobs, Apartment List’s chief executive. “I don’t see that improving in the near future.”

Demand for rental housing has grown as the U.S. economy has strengthened since the end of the recession nearly five years ago. Steady job growth has made it possible for more people to move out on their own and rent their own apartments. Yet rising home prices are preventing many from buying.

A combination of rising rents and sluggish pay gains will likely continue to weigh on the U.S. economy.

The trend is straining the finances of tenants like Michael Strane.

The geologist recently decided to move from Pasadena, Calif., to the Los Angeles suburb of Whittier, where asking rents jumped an average of nearly 14 percent last year, according to real estate data provider Zillow.

The location cut Strane’s two-hour commute to work in half. But he’ll be paying $1,045 a month, $200 more than he paid before.

“I’m actually paying more than I really feel comfortable paying right now,” said Strane, 39.

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.

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.

“We definitely see demand improving, especially the younger demographic coming out of college and being in their prime renter years,” said Brad Perozzi, managing director of the Picerne Group of apartment complex owners. “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.”

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,” said 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.

Higher demand and rising rents, unwelcome as they are for tenants, will produce more income for owners such as real estate investment trusts that operate buildings they acquire or build.