Apartment boom may put lid on rising rents

NEW YORK – Dec. 8, 2014 – As builders quickly ramp up U.S. apartment construction to meet rising demand, vacancy rates are starting to rise. That could help limit rent increases in 2015, according to economists with the CoStar Group.

The economists predict rent growth will slow to below 2 percent in 2015 as the multifamily market increases construction. They say apartment vacancy rates will rise in 46 of the country's 54 top metros over the next four quarters "due to the massive wave of current apartment deliveries and new apartment projects starting almost daily."

Vacancy rates – currently at 4.1 percent – will likely push higher than 5 percent by the end of 2015, according to CoStar. Still, even with the boom in building, apartment vacancies are expected to remain near 10-year lows across most of the country next year.

In 2014, builders will add more than 220,000 new apartment units to the country's housing stock. In 2015, another 250,000 completed apartment units are expected.

"At this point in the cycle, we've seen supply take hold almost everywhere," says Francis Yuen, who is with CoStar Portfolio Strategy. "Some late-recovery markets like Las Vegas aren't yet seeing vacancy increases yet; but even there, developers are beginning to find opportunities."

Some booming apartment markets that have seen more than 10,000 units added over the past four quarters include Dallas, Washington, D.C., Houston and Denver.

But many of the new construction projects are expensive luxury properties. Therefore, the affordability gap could widen. CoStar economists point to the Oakland/East Bay Area in San Francisco, where the average income has surged about 15 percent to more than $75,000 – but rents have grown 30 percent during the same time period. Rents now eat up more than 25 percent of a person's annual income there, Yuen says.

"Lack of affordability is certainly something we are beginning to see capping rent growth, especially at the high end of the market," Yuen says.

Source: "Apartment Construction Boom to Impact Rents, Occupancy in 2015," CoStar Group (Dec. 3, 2014)