A “For Rent” sign is posted in Carlsbad, Calif. Rents rose 2.3% in the second quarter compared with a year earlier, the weakest annual increase since the third quarter of 2010. PHOTO: MIKE BLAKE/REUTERS By Laura Kusisto June 27, 2018 WSJ It is a great time for anyone looking to rent an apartment: vacancy rates are rising and there are little or no rent increases in many major cities. For landlords, though, the U.S. apartment market suffered its worst spring since 2010, near the depths of the housing crisis. Driving this dynamic is a flood of new apartments and weakening demand. Rents rose 2.3% in the second quarter compared with a year earlier, the smallest annual increase since the third quarter of 2010, according to data from RealPage Inc. scheduled to be released on Wednesday. Rental growth was flat in major cities with otherwise strong economies—such as Austin, Portland, Seattle, Dallas and Washington, D.C.—due to large amounts of new supply. While average rents continued to grow, individual landlords cut rents in some markets. In addition, landlords are offering tenants incentives including as many as three months paying no rent, free parking, credit for ridesharing services like Uber and Lyft, and Amazon gift cards for as much as $2,500, according to renters, real-estate brokers and Hotpads, a rental search platform.
Joshua Clark, an economist at Hotpads who was looking recently for an apartment in the Capitol Hill area in Seattle, saw the $2,500 Amazon gift card offer. “I had my mouth open for a second. Seriously a lot of my expenses would be covered for the year, which would be fantastic,” he said. Landlords have enjoyed a record 32 straight quarters of annual rent growth on average, as the U.S. economy strengthened and millennials delayed homeownership. But the reports of slowing, which began in a few markets in late 2016, have intensified to the point that the balance is shifting towards renters and away from landlords. Greg Willett, chief economist at RealPage, predicted average rents nationwide could flatten if current trends continue. “It’s kind of telling as we look at some of these individual markets that are losing momentum because they’re important ones,” Mr. Willett said.
The cause of the slowdown is primarily new supply. Developers responded to escalating rents by building the most new apartments in 30 years, sending a flood of new high-end units to downtown areas across the country. Developers are expected to add 300,000 new units over the next year across the U.S., Mr. Willett said. At the same time as there are signs renter demand is starting to wane because millennials are marrying, having children and buying homes or moving into single-family rentals. The U.S. added 1.3 million owner households in the first quarter over the same period last year and lost 286,000 renter households, according to U.S. Census data released in April. Earlier this year, Manuel Valdes, 33 years old, and his wife got a surprise letter from his Seattle landlord offering to renew their lease — for $50 less than they were paying. Their rent had gone up $300 in the three years they had lived there. “We had been dreading another jump in rents,” said Mr. Valdes, who is a
journalist. His wife, Teresa Mosqueda, sits on the local city council. They now plan to use the extra money to save for a down payment for a house. Landlords rely on the warm spring months to fill apartment buildings because renter demand trails off in the colder months of the years. “The second quarter is when you get most of your rent growth for the year,” Mr. Willett said. The softening is taking place even in high growth cities. For example, the Dallas metropolitan area has the strongest job growth in the country. But Dallas area rents were essentially flat in the second quarter, down from 3.1% annual rent growth in the second quarter last year and a recent high of more than 6% rent growth in late 2015. Landlords there are offering tenants as much as two months of free rent. The problem in Dallas, landlords said, is simply too much supply. Developers are building about 22,000 apartments right now, compared with a long-term average of less than half that. “That’s just too much inventory,” said Ric Campo, chairman and chief executive of Camden Property Trust, one of the country’s largest apartment owners. “In order to get those apartments absorbed, even with good strong job growth, it’s taking the sizzle out of the market.” In Seattle, where Amazon has been an economic powerhouse and home-price growth has been the fastest in the country, landlords are also struggling to fill new units. Rents grew just 0.5% in Seattle compared with a year earlier, down from annual rent growth of 5.6% in the second quarter of 2017 and a recent high of 8.6% rent growth a year prior to that. Michael Chotzen, a Seattle property manager, said some buildings near him in the Capitol Hill neighborhood are slashing security deposits, requiring tenants to put down several hundred dollars or nothing at all. But that can be risky. “If a tenant trashes a unit there needs to be funds to cover that,” he said. Data released Tuesday from another apartment data provider, Reis Inc. also showed a largely weak rental market across the country in the second quarter. The national vacancy rate ticked up to 4.8% from 4.3% in the second quarter of 2017. The number of additional units that were rented fell to just over 37,000 from nearly 53,000 a year earlier, suggesting demand was weaker. Despite the recent slowdown, apartment owners note that the market is far from crashing and rent growth remains just below historic norms.
Little concern has arisen that the softening could have broader economic repercussions for the U.S. financial system. Compared with the last real- estate crash, owners say there are unlikely to be many foreclosures because they are carrying much less debt. Jay Hiemenz, president and chief operating officer of Phoenix-based Alliance Residential, an apartment company, said banks are only giving loans to developers for about 65% of the cost to build a project, compared to 80% or more previously. “Absent some shock that none of us can see, we will have a softer landing,” he said.