Why US rents will rise again this year

The China Post - - BUSINESS - BY ALEX VEIGA

Living in an apart­ment? Ex­pect your rent to go up again.

Rent­ing has got­ten in­creas­ingly ex­pen­sive over the last five years. The av­er­age U.S. rent has climbed 14 per­cent to US$1,124 (NT$34,899) since 2010, ac­cord­ing to com­mer­cial prop­erty tracker Reis Inc. That’s four per­cent­age points faster than in­fla­tion, and more than dou­ble the rise in U.S. home prices over the same pe­riod.

Now, even with a surge in apart­ment con­struc­tion, rents are pro­jected to rise yet an­other 3.3 per­cent this year, to an av­er­age US$1,161, ac­cord­ing to Reis. While that’s slower than last year’s 3.6 per­cent in­crease, the broader up­ward trend isn’t go­ing away.

“The only re­lief in sight is rents in the hottest mar­kets are go­ing to go up at a slower pace, but they’re still go­ing to go up,” says Hes­sam Nadji, chief strat­egy of­fi­cer at Mar­cus & Mil­lichap, a com­mer­cial real es­tate ser­vices firm.

The main rea­son: More peo­ple than ever are apart­ment hunt­ing.

Young peo­ple who have been living with their par­ents are in­creas­ingly find­ing jobs and mov­ing out. Ris­ing home prices are lead­ing many long-time renters to stay put.

In ad­di­tion, most of the new apart­ments com­ing on the mar­ket are aimed at af­flu­ent ten­ants and carry higher-than-av­er­age rents. That’s es­pe­cially true in cities where new build­ings are go­ing up in ur­ban core ar­eas, which means builders need to re­coup higher land and devel­op­ment costs.

Con­sider Den­ver, where rents have in­creased more than 5 per­cent a year since 2010 — 9.2 per­cent in 2014 — ac­cord­ing to Mar­cus & Mil­lichap. Of the 9,400 new apart­ment units added last year, 23 per­cent were in ur­ban core ar­eas.

Com­pe­ti­tion for apart­ments means renters are less likely to be able to ne­go­ti­ate with land­lords, or win con­ces­sions such as a free month’s rent.

Here’s a closer look at why apart­ment dwellers will prob­a­bly see rents go up for a sixth straight year.

More Jobs, More Com­pe­ti­tion

Dur­ing the last re­ces­sion many work­ers who lost their jobs moved in with rel­a­tives or took on room­mates. About 32 per­cent of U.S. adults were living with room­mates or adult fam­ily mem­bers in 2012, up from 27.4 per­cent in 2006, ac­cord­ing to Zil­low, an on­line real es­tate firm.

Stepped-up hir­ing has be­gun to re­verse that trend. About 2.8 mil­lion more Amer­i­cans have jobs than 12 months ago.

“The share of young adults with jobs has climbed in the past year, and that will help many of them move out of their par­ents’ homes,” says Jed Kolko, chief econ­o­mist at on­line real es­tate firm Tru­lia. “Most of them will be renters first.”

More peo­ple vy­ing for apart­ments helps drive rents higher. And metropoli­tan ar­eas with faster job growth are gen­er­ally see­ing high­erthan-av­er­age rent hikes as well.

The three metro ar­eas with the big­gest an­nual in­crease in rent in Jan­uary, ac­cord­ing to Tru­lia: Den­ver (14.2 per­cent), Oak­land, Cal­i­for­nia (12.1 per­cent), and San Fran­cisco (11.6 per­cent).

Job growth in each of those cities also eclipsed the na­tional growth rate of 2.3 per­cent over the 12 months ended in Jan­uary. Em­ploy­ment grew 3.7 per­cent in Den­ver, 2.7 per­cent in Oak­land and 4.5 per­cent in San Fran­cisco.

Tra­di­tion­ally, rent­ing has been a step­ping stone to­ward home­own­er­ship. When rents rise, ten­ants are mo­ti­vated to buy sooner, es­pe­cially when in­ter­est rates are near his­toric lows, as they are now.

But th­ese days, renters are tak­ing longer to buy. The U.S. home­own­er­ship rate ended last year at a 19-year low of 64.4 per­cent.

Be­tween higher rents tak­ing a big­ger bite out of the bank ac­count and sharply higher home prices, po­ten­tial buy­ers are hav­ing more trou­ble sav­ing for a down pay­ment and qual­i­fy­ing for a mort­gage.

And many mil­len­ni­als, or 18- to 34-year-olds, sim­ply pre­fer rent­ing.

That’s true for Alyssa Hank­ins, a mar­ket­ing and so­cial me­dia strate­gist in Los An­ge­les. She moved in Fe­bru­ary to a newly opened com­plex where rents range from US$2,325 for a stu­dio to US$5,920 for a two-bed­room unit. She wants to be able to move quickly if a job op­por­tu­nity comes up.

“It’s less about af­ford­abil­ity and more about flex­i­bil­ity,” says Hank­ins, 29.

When renters stay put, fewer apart­ments are avail­able for new ten­ants, which in turn drives up rents.

De­vel­op­ers added 238,000 apart­ments na­tion­wide last year, a 14-year high, with an­other 210,000 ex­pected this year, ac­cord­ing to Mar­cus & Mil­lichap.

In the­ory, more apart­ment con­struc­tion should help bring down rents be­cause land­lords would com­pete for ten­ants. But 80 per­cent of new com­plexes, Nadji es­ti­mates, are high-end projects aimed at renters will­ing to pay a pre­mium for ameni­ties like gourmet kitchens and concierge ser­vice.

How much of a pre­mium? The av­er­age rent for apart­ments com­pleted last year was US$1,721. That’s 46 per­cent higher than the av­er­age apart­ment rent for older units, ac­cord­ing to Mar­cus & Mil­lichap and data provider MPF Re­search.

“There’s very lit­tle new sup­ply be­ing added any­where else,” says Nadji, “so that’s why there’s so much pres­sure on rents and very lit­tle choice for the av­er­age renter.”

AP

In this March 18 photo, vis­i­tors tour an apart­ment at the Gibson Santa Mon­ica, a new luxury apart­ment build­ing in down­town Santa Mon­ica, Cal­i­for­nia.

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