Although inflation continues to be very low, the one part of the economy where rates are skyrocketing is in apartment and home rentals. While this isn’t a favorable trend for anyone who rents, it’s often of great concern to my millennial clients who, on average, feel more inclined to rent versus buy.
In fact, I just met with a young client who received a 12% rental increase notice. When he questioned his landlord about the notice, the reason he was provided for the massive rate hike is that they were “just keeping pace with competition.”
In other words, it’s a landlord’s market and strong demand continues to give them justification to dramatically raise the rates. Sadly, this has been the trend for some time.
Past Rental Rate Trends
Home rental costs have jumped 14 percent since 2011 and, as shown in the chart below, are expected to grow over three percent this year alone.
Additionally, occupancy has been at or above 95 percent for 10 straight months, and 14 of the past 20. This proves that not only are landlords able to charge higher rates, but there’s no shortage of people willing to pay them.
For this reason, apartment construction has been strong and geographically motivated, with buildings being centered in areas where rental rates offer higher returns. But if you look closely, you will see that two distinct apartment markets exist.
Two Distinct Apartment Markets
The pipeline of new rental properties is rich and full in urban centers. Ultimately, this is good news for millennials who prefer city living, as it will likely temper the rent gains there over the next few years.
When doing the math on suburban or Class B markets, however, developers and investors just don’t see desirable returns. In this instance, weak income growth will simply not support rent growth.
In fact, some studies have shown that, in certain areas, it is now more affordable to buy a home than to rent. Yet, this idea is counterintuitive to what most millennials want to do.
Millennials and Rentals
A 2015 National Association of Realtors survey was conducted on existing-home sales and it found that millennials are not showing interest in the American dream of owning a house. Rather, they are choosing to rent instead.
This makes sense because the housing market is not exactly making it easy for millennials to buy homes. Aside from student loans and onerous mortgage requirements, millennials also tend to ask themselves why they should own a house when they are not ready to settle down. They simply don’t want to be tied to a particular job, home, or even city.
Lifestyle habits are a significant contributor to this type of decision as well. Millennials are getting married later in life than previous generations, and a sense of urgency to purchase a home comes with stability, marriage, and growing families.
So what does the future of rentals look like, particularly for this portion of the population?
The Forecast of Rentals
There is new apartment inventory in the pipeline as thirty-five percent of new home starts in 2015 were multi-unit. That is the highest share since 1973.
Urban centers with growing technology sectors like Seattle, Denver, Portland, Nashville, and Charlotte are seeing the greatest development. Therefore, rental relief will be spotty as developers are simply going wherever demand is highest and the most lucrative.
This means that millennial renters will continue to need to brace themselves as rent is expected to continue at double the rate of inflation for at least two more years.
While you can’t necessarily do anything to stop it, planning for this increase can help minimize its effects.
That’s what we do at Spending Plan Advisors: we forecast and plan personal cash flow helping our clients anticipate the next financial surprise that awaits them.