While there will likely be “robust demand” in 2015 from renters — and young adults, in particular — builders have already started and plan to start enough new apartment projects that the days of excess demand may soon be over, said Ryan Severino, senior economist at Reis, a New York-based research firm focused on commercial real estate.
“Demand will struggle to keep pace with the significant amounts of new construction that should come online over the next few years,” Severino said.
Growth in rents over coming years should remain positive, according to Reis, but it will likely slow from 2014’s heady pace of about 3.5%, which far outpaced overall consumer inflation.
“Although an improving labor market with more jobs and faster wage growth should provide landlords with more leverage to increase rents, over time this will be stymied by the sheer number of new units that are going to come online, increasing competition in the market,” Severino said.
The frenzy for apartments has been fed by a choppy jobs market that made it tough for workers to set aside enough cash for a down payment. Also, persistently high credit standards have kept singles and families from obtaining a mortgage, a key financial ingredient for many would-be homeowners, particularly first-time buyers.
Seeing an opportunity, developers ramped up apartment building. The rate of private construction spending on new multi-family residences was up 27% in November from the year-earlier pace, more than double a 13% gain for new single-family homes, according to government data. Meanwhile, outstanding multifamily-mortgage debt swelled in the third quarter, rising the most since the end of 2007, the Mortgage Bankers Association said Tuesday.
Rental vacancy rates are the lowest in 20 years, which gives landlords power to raise rents. Government data show that landlords recently ramped up rents by the fastest pace in six years. But that power may taper as the supply of rental units rises.
“With a veritable deluge of new supply set to come online over the next few years, vacancy is headed higher. The supply pipeline swells larger and larger on a weekly basis and presents the greatest risk to the apartment market’s health,” Severino said.