In 2010 and 2011, rents went up 2.3 percent and 4.7 percent across the country, according to Carrollton, Texas–based rental data provider MPF Research. However, during that same time frame, wages jumped only 2 percent from the third quarter of 2010 to the third quarter of 2011, according to the Bureau of Labor Statistics. That’s led a number of industry observers to ask an obvious question: How long can rent growth continue without an improvement in wages?
“At what point do individual renters feel they’ve hit the wall with what they can afford?” asks Greg Willett, who heads the research and analysis team at MPF. “It's really hard to calculate when that picks up. In the long term, over the remainder of the decade, I think that’s our key challenge.”
Another data provider, Novato, Calif.–based RealFacts, found that aggressive rent hikes in the second and third quarters of 2011 weren’t sticking. In its year-end survey, the company found that rents in 24 of its 47 markets had gone down. The qualifier, of course, is that the fourth quarter can typically be a very sluggish rental season, and it’s hard to use performance in that quarter as a gauge for the health of the rental industry.
“As long as there’s demand, owners will keep raising rents until the market says stop,” says Sarah Bridge, owner of RealFacts. “That’s what happened. It’s not that they’re [renters] unwilling to pay. It’s just that their income hasn’t grown.”
As owners try to drive revenue, they’re often pricing current residents out of their units. Some companies, like Charleston, S.C.–based Greystar, are already seeing the rent get too high in some areas, such as Washington, D.C. “Rental increases are becoming a bigger and bigger reason for move-outs,” says Andrew Livingstone, an executive director with Greystar. “People have to move down because they can't afford these increases. The issue is going to be around, how much more rent can people pay?”
RealFacts says markets like Reno, Nev. (down 2.1 percent); Seattle (down 1.4 percent); Tampa, Fla. (down 1.3 percent); Las Vegas (down 1.1 percent); and San Diego (down 0.7 percent) saw the biggest declines in the quarter. Some of these markets are just recovering from an influx of for-sale supply, while others, like Seattle, are poised to see big construction numbers in the next couple of years.
But Bridge cautions that it’s not time to start sounding alarms yet after five quarters of growth. “We’re not talking about catastrophic problems,” she says. “In 2010 and early 2011, we saw pretty healthy growth in most markets. In the third and fourth quarters, some of those gains that we realized [were] eroded a little bit.”
There is also some hope for apartment owners in Bloomberg BNA’s Wage Trend Indicator™ (WTI), which rose in the fourth quarter for the sixth straight time and is expected to go up.
"Barring any major shocks to the U.S. economy, we expect modest acceleration in wage growth during the course of 2012," economist Kathryn Kobe, a consultant who maintains and helped develop Bloomberg BNA's WTI database, said in a news release. "The uncertainty about the economic outlook is still quite high, particularly with the European debt crisis still sitting out there as a big question mark.”