If you’re an apartment owner in the United States, get ready for the golden age. Since hitting recessionary lows in 2006 and 2007, average rents, which were up to 30 percent off peak values, have climbed back, despite a tepid economy and weak job growth. Consider this: Year-to-date, effective rents (net of concessions) will rise 5.9 percent this year, which would be the largest annual increase since a 5.8 percent leap in 2005, according to estimates by Dallas-based apartment market research firm Axiometrics. “2010 was a very strong year in terms of effective-rent growth, but in 2011, we are seeing rents rising at an even faster pace,” says Axiometrics president Ron Johnsey. “Renters who are able might be wise to sign longer-term leases, as property owners will maintain pricing power through the rest of 2011.”
In fact, 2011 is expected to be the beginning of a boom time for multifamily property investors and operators. Driving this growth will be a significant supply/demand imbalance (the recession made it impossible to finance new construction); a reticence among consumers to invest in single-family homes (discounting homeowners in financial default, New York–based Morgan Stanley puts homeownership levels at a post–World War II low of 59.7 percent); and an 80 million–strong Gen Y demographic now entering its prime renting years (and showing a preference for chic, green, wired, downtown apartments).
So with seemingly everything working in favor of apartment owners, is it possible that landlords could raise rents too high, too fast? “The answer to that question is no,” says Bob Faith, CEO of Charleston, S.C.–based Greystar Real Estate Partners, which, with 187,360 units, ranks as the largest property manager in the country. “You push as hard as you can, as fast as you can, and you ultimately reach the point where the renter does not have the ability or the desire to commit a larger percentage of their monthly income toward their housing.”
In other words, let American consumer dollars speak up when rents have moved out of reach. Faith is quick to point out that rents have yet to recoup their historical highs. What’s more, in this industry, everything depends on location, so wide variations can exist from market to market as to what renters are willing to pay for sweet digs.
“We can only charge as much rent as people can afford to pay,” says Steven Fifield, chairman and CEO of Chicago-based Fifield Cos. “But what you see is that people are willing to spend a higher percentage of their income to live in more desirable locations. In Chicago, people will generally pay about a third of their income, compared with in Santa Monica, Calif., where they’ll pay up to 50 percent. So in Chicago, at 33 percent, $1,200 a month in rent means that someone who has an income of around $43,000 a year can afford to rent a luxury building with all the amenities. If you’re in Chicago, where AMI is $57,000 a year, it’s hard to argue that apartments aren’t still affordable.”
That doesn’t mean that rent increases aren’t without risk. Particularly for new lease-ups, oversetting rents relative to the market could leave the leasing office empty of traffic and tempt sales associates to rely on concessions and other specials to build occupancy, compromising a property’s overall effective-rent roll.
Apartment operators would also be wise to look for wrath not from residents and prospects, but from the representatives whom those individuals have voted into jurisdictional power.
“We lost a lot of ground [in rental revenue] in 2008 and 2009, but when civic leaders see rents going back up, it’s, ‘Oh, those greedy landlords are gouging again,’?” explains Washington, D.C.–based National Multi Housing Council president Doug Bibby. “If you’re running a business and your prices are just now recovering to where they were five years ago, that isn’t exactly gouging. It’s very important that people understand we are still in recovery mode. But on our side, it’s also important to understand that in some municipalities, there is going to be some backlash if rents are pushed too far too fast, because people don’t remember how far down rents went.”