Americans are paying more to live in apartments, as demand for housing increases and many would-be homebuyers are forced to rent because prices for houses have gotten too steep.
It’s a boon for owners of big apartment communities more than a year after the economy fell into a recession that left millions of Americans unemployed and struggling to pay rent. Zillow, which tracks housing data, says its rent index rose 7.1% in June, the biggest year-over-year increase going back to 2015.
Government efforts to support Americans hurt financially by COVID, including relief payments, have almost certainly helped tenants keep up with their rent. At least one measure of rent collections shows fewer tenants are failing to keep up with payments than just a few months ago. And while apartment vacancies haven’t fallen back to pre-pandemic levels, they’re basically in line with the 10-year average.
Rising apartment rents represent a shift from earlier this year, when they weren’t growing and vacancies kept rising. That changed in the spring when pandemic-related restrictions were loosened following a ramped-up distribution of coronavirus vaccines. Since then, an improving economy and job market have helped stoke demand for rental housing.
“The tide has really turned quite a bit for (apartment) rentals because of these factors,” said Victor Calanog, chief economist at Moody’s Analytics REIS.
The national average effective rent, a key industry measure, increased by 0.6% in the second quarter, according to data from Moody’s Analytics REIS, which tracks owners of communities with at least 50 apartments. The April-June increase snapped a string of four straight quarterly declines, lifting the average U.S. effective rent to $1,394.79. It was also the biggest since the third quarter of 2019. Effective rent is what’s left after taking out concessions offered sometimes by landlords to woo tenants.
Figures from Zillow, which tracks a wide swath of rental properties, including those owned by individual investors, show typical rents rose to $1,799 in June.
Freddie Mac projects U.S. apartment rents will rise 2.5% this year, while the vacancy rate slips to 5%. The forecast is based on the assumption that growth in the economy will continue through the rest of the year and into 2022.
With demand picking up, landlords are feeling less pressure to offer tenants incentives such as a free month’s rent, Calanog said.
“You could have gotten that six months ago, but no more,” he said.
In another sign of improving trends for apartment owners, fewer tenants have been failing to pay their rent than just a few months ago, according to data from the National Multifamily Housing Council, an apartment industry group.
The data, which is drawn from rent payments on more than 11 million apartments, show that the percentage of apartments where rent was paid by months’ end inched up to 95.6% in June after falling the two previous months. In June last year, the rent collection rate was 95.9%, then fell gradually until it hit a pandemic-low 93.2% in January.
One metric that hasn’t improved is the national vacancy rate for apartments. It stayed at 5.3% this year, according to Moody’s Analytics REIS. In 2020, it went from 4.8% in the first quarter to 5.2% in the fourth quarter.
Efforts by federal, state and local authorities to help renters who would otherwise be evicted for missing rent payments have likely helped keep vacancy rates from climbing higher.
A federal moratorium on evictions expired at the end of July, setting the stage for mass evictions at a time when an ultra-contagious mutation of the COVID-19 virus is spreading across the U.S. But late Tuesday, the Centers for Disease Control and Prevention issued a new ban on evictions through October 3 in counties with high levels of coronavirus transmissions.
“You can’t rule out the very real possibility that vacancies have been stable because of eviction moratoria,” Calanog said. “Is it the fake kind of stable?”
Recent earnings reports from several real estate investment trusts, or REITs, that own apartment communities reflect the rental market’s solid demand trends.
Mid-America Apartment Communities, which owns more than 100,000 apartments across 16 states, increased its earnings outlook for the year after reporting better-than-expected results last week, thanks largely to strong demand. The company said new and lease renewal rents at apartments in communities open at least a year jumped 12% last month from a year earlier.
Three of the other biggest apartment REITs — AvalonBay, Equity Residential and UDR — have also recently reported quarterly results that topped Wall Street’s forecasts.
In a research note last week, analysts at Mizuho Securities said the apartment sector remains a “must-own.” Mizuho has “Buy” ratings on AvalonBay and UDR.