Rent growth slows, but affordability remains an issue for rental apartments
Overall, we expect the multifamily market to remain fairly stable in 2017. We expect the national vacancy rate to rise a bit. And we should see some slowing in rent growth. But we don’t think this will be all that beneficial to the affordable segment of the market.
There are many factors to watch that affect housing affordability. Household income and asking rent levels are two of them. All other things being equal, rentals become more affordable when the income of households grows more than the cost to rent.
National household incomes should outpace rents by about 2 percent over the next two-year period, assuming projections hold. Moody’s Analytics estimates that median household income will grow by a robust 6.9 percent over this time. And according to data from CoStar, rents will grow 4.8 percent. Even so, this will contribute to only modest improvements in the affordability of rental housing. And the question is why.
There are two things to look at. The first is location. For renters, a lot depends on it.
For instance, if you are shopping for a rental apartment in Houston, you may be in luck. The most populated city in Texas can expect household income growth to exceed rent growth by an estimated 10 percent. That’s because Houston has too many new multifamily units coming on line. This year it should receive delivery of 9,500 rental apartments. But there is demand for only about 4,000. This is what leads to lower rents, and it can increase affordability.
But hefty amounts of new supply are no guarantee of large improvements in affordability. Take Denver. The city is in the midst of a massive supply wave. It has seen the delivery of 27,000 units since 2012. And an additional 16,000 units are underway. However, Denver’s job and population growth are strong. So are its household formations. As a result, its vacancy rate was only around 5.25 percent in the fourth quarter of 2016. That’s on the low side of the historic average. Denver has enough new jobs to support most of the new multifamily production. So wage growth is likely to outpace rent growth by an estimated 3.6 percent. That points to only a modest improvement in affordability.
In Florida’s Jacksonville, Tampa, Orlando, and Miami markets, rents look quite affordable by national standards. Their rental affordability has declined a bit in the past couple of years. But today’s outlook is more favorable. The cities have seen their job markets strengthen. And that has coincided with a pickup in new apartment supply. Over the next two-year period, they will see incomes outpace rents by at least 3 percent. In Tampa, where job creation is especially brisk, the number is likely to exceed an estimated 5.5 percent.
And then there are places where affordability will likely stagnate or continue to decline. Rents will continue to grow faster than incomes in Orange County, CA, for example. And the influx of people seeking jobs in San Antonio, Dallas, and Austin will balance out the large amounts of supply those Texas markets have coming on line. They are likely to see little to no improvement in the affordability of their multifamily housing.
Rise in High-Rent Units
There is a second reason we don’t expect to see subsantial improvement in nationwide affordability this year. The new supply is concentrated in just 12 metro areas. And most of the new supply consists of higher-priced Class A units.
The new supply won’t add significantly to the stock of Class B and C apartments that provide affordable housing for working households. In fact, recent history shows there is simply too much demand and not enough supply for this important segment of the market.
Data from Reis, Inc. show the vacancy rate for non-subsidized Class B and C multifamily rentals falling to just 2.8 percent in last year’s fourth quarter.
Sample data from Reis suggests that since the end of the recession, the number of Class A units grew by an estimated 800,000 through 2016 – to 4.7 million. In sharp contrast, the number of Class B and C units remained virtually unchanged – at an estimated 5.7 million units. This trend is not likely to change over the next two years.
The imbalance between supply and demand for all types of affordable housing (including subsidized) remains an ongoing issue. The Department of Housing and Urban Development recently reported that there were 2.2 million more renters with worst-case housing needs in 2015 than a decade earlier. It will take much more than one year of modest improvement in affordability to reverse this long-term trend.
Opinions, analyses, estimates, forecasts, and other views of Fannie Mae’s Multifamily Economics and Market Research Group (MRG) included in these materials should not be construed as indicating Fannie Mae’s business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the MRG bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the MRG represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.