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Sky-high rents and falling vacancies have characterized the U.S. apartment market for the past six years, but that is suddenly changing. The share of apartments available for rent rose for the second straight quarter at the end of last year, the first time that has happened since 2009, according to real estate data firm Reis.
"This truly represents a turning point in the apartment market. With construction outpacing demand, the national vacancy rate should slowly drift higher over the coming years," said Ryan Severino, senior economist and director of research at Reis.
Vacancies are rising, but rents are also still rising at a robust pace, up 4.6 percent annually. This is well ahead of core inflation and the strongest performance for rents since 2007, before the recession.
"The low vacancy rate, improving economy, tightening labor market and gradually rising income growth is providing all of the fodder for continued rent growth, even in the face of rising construction," added Severino.
Rising construction, however, is largely on the high end. That is where vacancies are starting to show up. New York City, which commands the highest rent in the nation at an average monthly payment of $3,400, is seeing rising vacancies. San Francisco, No. 2 in rent, is showing vacancies are now flat.
In Washington, D.C., vacancies are falling, despite thousands of brand-new rental apartments coming onto the market. Rents, however, are seeing gains below the national average.
"DC has seen an extraordinary amount of new development with unprecedented units, but what is also unprecedented is the demand," said Toby Bozzuto, CEO of The Bozzuto Group, a real estate development and management firm operating in major markets, including DC, Boston, New York, Chicago and Atlanta. "The demand has been incredible. We've had very, very strong lease-ups. The only thing we haven't been able to do is move rents up because supply is so strong."
Bozzuto admits he is concerned that so much of the new development is in luxury projects. Millennials and downsizing baby boomers alike demand the latest and greatest amenities, but there are a limited number of them who can afford all the bells and whistles. Job growth has been improving, but income growth has not.
"Every new building we built is so expensive — the land, construction, labor — that the rents we have to charge to make a feasible return are high. So to what degree are we creating a tranche of housing just for the elite, and at what point does housing become unaffordable? At what point does it become not sustainable to rent? I fear we may end up like that."
There are currently 9 million more renters than there were just a decade ago, the biggest jump in renters on record.
Of the nation's now 43 million families and individuals who rent, 1 in 5 is considered "cost-burdened," or paying more than 30 percent of their incomes for rent, according to the Harvard Joint Center for Housing Studies. The number of "severely" cost-burdened renters, those paying more than half their incomes for rent, went from 7.5 million to 11.4 million in the last decade.
The vast majority of new apartment construction has been in pricey urban centers. There has been big growth in the number of single-family, suburban rental homes, but these properties, while often cheaper per square foot, are larger than apartments, and therefore more expensive.
Developers are starting to look at so-called B markets, where demand is very high and supply is at a minimum, but costs often stand in the way. The return on investment, after land and labor, is often not worth it. A much bigger crack in the luxury rental market may be needed to push developers out to where construction is most needed.
CORRECTION: The CEO of the Bozzuto Group is Toby Buzzuto.