Over the past two weeks, I have highlighted how housing prices and rents increase without new development- through filtering at large multifamily properties and at smaller rentals as individual landlords decide to upgrade their units one at a time. The flip side of this phenomenon is the question: Is there is evidence that expanding the supply of housing can put downward pressure on rents, and can prevent mid-market housing from filtering up to become higher-end rental property?
The answer is an overwhelming YES. But don’t take my word for it, just read a whole bunch of newspaper articles with data below. None of them use the word “filtering” explicitly, but virtually all of them reference filtering in housing markets in one way or another. I’ll make some brief comments after a few articles.
Austin, TX – 2/2/2015 (Austin American-Statesman)
The boom in apartment supply dropped the area’s occupancy rate to 94 percent in the last half of 2014 — the lowest occupancy level in more than three years, and nearly 4 percent below the recent high of 97.8 percent in June 2012…With all those new units entering the market, supply is catching up to demand. And that means apartment rents are stabilizing after rising rapidly — sometimes as much as 7 percent per year — from 2010 through 2013. The average rent in the metro area was $1,107 a month in December — an all-time high, but an increase of only $8 from the average rent for June, Heimsath said.
Comments: This article notes how the expansion of supply in Austin has increased vacancies, which is another way of saying there are more multifamily properties with idle income-producing units each month, who are now more likely to make deals on rent. Here the supply of new units has cut rent increases from 7% to 0.7%- or $8/month on a unit that rents for $1,107.
Washington, DC – 1/4/2015 (Washington Post)
This new supply forced landlords at some four- and five-star buildings to reduce rents in order to fill their units. As a result, rent growth dipped into the red briefly in 2008, and then again for most of 2009. The Great Recession also had an impact, as some former four- and five-star renters moved to older, cheaper three-star buildings to save money. This increased demand for three-star units, allowing landlords there to continue raising prices.
In recent years, the effective rental growth rates of three-star and four- and five-star buildings have diverged even further. Just as in 2007, this is largely a result of the recent construction boom in the Washington area. An unprecedented number of new apartment units (about 24,000) have arrived in the area in the past two years, increasing the total apartment inventory by roughly 5 percent.
That new supply wave cut rents for four- and five-star apartments even further, even as rents at three-start apartments continued to outperform. But the narrowing may be slowing as the wave of supply takes its toll on three-star rents as well, working in renters’ favor.
Comments: This article identifies some of the submarkets in DC, separating out 3-star properties from 4-star and 5-star properties, and describes how the influx of new high-end units has had rents falling since 2013. (see chart) Also of interest are the descriptions of people moving from one submarket to another because of the Great Recession.
Closer to home, a piece on the Triangle Apartment Market as a whole – 11/19/2014
A total of 7,965 new apartment units have been completed in the Triangle over the 12-month period ending in September, according to MPF Research, which analyzes apartment data in 100 U.S. metro markets. That is easily the largest amount of new supply added over a 12-month period in the 20 years that MPF has been tracking the Triangle.
According to MPF, demand for new units over that same period totaled 6,940 – a hefty number but still below supply.
The new supply has helped slow rent growth in the Triangle. Rents were up 1.7 percent in the third quarter compared to the same period a year ago. That was well below the 3.7 percent average increase across the United States.
Comments: Pretty self-explanatory. More units coming online slowed rent increases compared with national averages.
More local data, in Durham – 2/14/14
The boom in apartment construction in Durham County and across the Triangle has helped to bring down average rental rates, according to a recently released report from the Charlotte-based market research firm Real Data.
However, a real estate company behind one of the new apartment complexes in downtown Durham expects to be able to buck that trend due to the location and type of product it’s offering.
Across Durham County, the average rental price per unit in January was $887. That was down 2.3 percent compared with the average in July of last year. That’s a larger decline than was seen in the three Triangle counties of Wake, Durham and Orange, where the average was down 1.7 percent to an average rate of $868 per month.
Vacancies have risen as some of the units in the new complexes have come online, the firm reported. Real Data had a total of number of 3,045 units under construction in Durham County, which is 30 percent of the number of units – at 10,028 – under construction across the Triangle.
Although averages are coming down, according to the firm’s reporting, it appears that the newer units are being rented out at the expense of older communities. Existing communities saw a net loss of 306 renters across the Triangle, according to Real Data, while there was a positive net unit absorption of 1,436 units.
Comments: The last sentence (emphasis added is mine) is a perfect description of filtering with new units attracting high-end submarket renters to the newest, latest/greatest housing. This raised vacancies at existing multifamily properties,and rents fell 2.3 percent across the market, making housing more affordable.
And in Chapel Hill on Rosemary Street – 3/31/2014
Students stood in line with keys outside of the LUX apartments leasing office on Franklin Street Thursday hoping to open a treasure chest that would give them free rent for a year. At one point they were approached by two people handing out treats with advertisements for The Warehouse on them.
“I incorrectly thought it was LUX employees trying to pacify people who were waiting in line, but I was wrong,” UNC student Lauren Sutton said. “I got my rice krispie treat and flipped it over and there was a sticker on it saying, ‘Warehouse apartments: Now Leasing,’ and their prices for rent.”
The Warehouse did not return requests for comment.
But the complex did lower its monthly rent for four-bedroom apartments to $618 for next year, down 21 percent from $785 this year, according to the complex’s website.
Comments: Classic response to visceral competition from brand-new amenity rich building directly across the street- move your rents to a new, lower-rent submarket to compete!
You see that there are all kinds of affordable cities in the United States. There are plenty of low-demand cities, especially in the midwest, where the housing stock has grown slowly and prices are low. But there are also plenty of cheap, fast-growing cities in the sunbelt where the housing stock is growing rapidly and keeping things affordable.
And then there are the expensive cities. The places where house-sellers are asking for over $200 per square foot. All of them are cities where the housing stock is growing slowly, even though these are the places where it would be most profitable to build. That’s because these cities tend to have geographical constraints that prevent further sprawl, and have adopted zoning codes that make it difficult to add more housing by building more densely.
Here’s the chart, courtesy of Trulia.com:
As I was working on this post over the last few days, I was trying to put together a good summary paragraph when an excellent blogger in Chicago, Daniel Kay Hertz, took up the same topic and posted this excellent conclusion for affordability:
But the bottom line is that slow, zero, or negative cost-of-housing growth is better than fast cost-of-housing growth. (At least, that is, in high-cost neighborhoods/metropolitan areas.) The vast majority of low- and moderate-income people live, and will continue for the foreseeable future to live, in non-subsidized housing. Even in New York, which has held on to its public housing better than most other large expensive cities, it only makes up something like 7% of all units. That means that it’s exactly these kinds of market trends – consistently large rent hikes, year after year, in mid-ish market housing – that makes a neighborhood, or city, or metropolitan area, eventually unaffordable to working- and middle-class people.
And it turns out that construction booms arrest that sort of pattern, or prevent its continuation, all the time.