Even in Pittsburgh's red-hot East End, signs of a cooling rental marketplace

Post Gazette - Tim Grant - 21 November 2016

In an area of Lawrenceville where new upscale apartment buildings have begun to dominate the landscape, Vince Schiappa figures he was lucky to find a place in an older building where the landlord is charging about half of what apartments in newer buildings are renting for.

“I know rents are rising in this area, but my landlord has been keeping it relatively low for students in the area,” said Mr. Schiappa, 26, who pays $750 a month for a two-room unit near Liberty Avenue and Baum Boulevard. The average rent for a one-bedroom apartment in that area has blown up to about $1,405 a month, according to Rent Jungle, a company that tracks rental rates.

Since the end of the recession six years ago, the rental market has been red hot in the city’s East End communities — neighborhoods such as Lawrenceville, Shadyside, Squirrel Hill, Bloomfield and East Liberty.

Spurred by the proximity to major universities, prominent companies like Google and the revitalization of commercial corridors in those communities, a stampede of real estate flippers rushed in to buy and renovate old buildings. Developers also built one apartment building after another in anticipation of more demand from young professionals who prefer upscale living.

But there are signs that rental rates in the East End have begun to cool off.

 

PG graphic: Trends for East End rental units
(Click image for larger version)

Property managers with rental units say their vacancy rates are creeping higher, possibly due to an increasingly saturated rental market. Some landlords who priced their rents too aggressively during the boom years are being forced to either accept lower rents or allow units to remain vacant.

And while average rents on the East End are still higher than they were a decade ago and higher than in other areas of the city, such as the North Side or Dormont, rental prices are no longer rising at the pace they had been.

“We have property owners in Lawrenceville who are renting their apartments for less this year than last year and wondering why,” said Steven Welles, owner of Ikos, an East Liberty-based company that finds tenants for landlords. The company’s clients range from landlords with only one unit to those with 300 units.

Some clients haven’t been able to find renters at all, Mr. Welles said, adding that many people got overconfident about how much they could extract from the market.

Amenities become a factor

Location has been a key factor in the rising rents but it turns out that apartment sizes and amenities are becoming a bigger factor than they might have been in the past.

Average rental prices for apartments and houses in the East End have been rising steadily since 2014, according to Rent Jungle, a North Shore-based company that compiles data on rental price trends for real estate investors here and across the country.

For instance, the average rent for a one-bedroom unit in 2014 in the East End was $1,081 a month. The most recent data for 2016 shows one-bedroom units renting for an average $1,405 a month. The company only maintains data on rental records for two years.

However, rental prices on three-bedroom units over that same time frame have either remained stagnant or fallen. Three-bedroom units in 2014 were renting for an average $1,851 a month. Today, three-bedroom units are priced at an average $1,822 a month.

“It turns out that three bedrooms have been doing the worst in this area,” said Spencer Whitman, general manager of Rent Jungle, who said rents for every other type of apartment — studios, one bedrooms and two bedrooms — have been growing consistently.

“It’s not that three-bedroom units are not as desirable, so much as the prices for them is not growing as much,” Mr. Whitman said. “There’s a lot of reasons why that could be the case. One could be that we are seeing a lot more of the luxury units coming on the market and those are primarily studios, one-bedroom and two-bedrooms.”

Also, many of the three-bedroom units on the market could be older homes and apartment buildings where the owners are reluctant to increase rates because their properties don’t offer the amenities offered by the new apartment buildings, such as swimming pools, fitness rooms and lounge areas.

Researchers at Rent Jungle gather information on rental trends by analyzing rental housing advertising from many sources, including newspaper classified ads and websites dedicated to helping people find rental housing

Mr. Whitman pointed out that new luxury units in the East End market also could be inflating the average price for rental units in that area — masking the large range of prices that apartments are renting for.

For instance, the minimum advertised rent for a studio apartment in the area of Negley Avenue and Centre Avenue in October was $300 a month, while the maximum advertised rent for a studio apartment in that neighborhood was $1,929 a month.

A long-term bet

John Petrack, executive vice president of the Realtors Association of Metro Pittsburgh, said permits have been issued for about 5,600 new and rehabbed apartment units in the Pittsburgh area in the past five years and only about 60 percent have been absorbed by the market so far.

“Especially in the high-end apartments,” he said. “The market has been saturated.”

“The market got strong and everybody ran out and said, ‘Hey let’s develop high-end apartment units,’” he said. “And the market got saturated. Now in the high-end market places there is an oversupply. Developers will have to make a decision.

“Can they lower rents, leave them empty or offer incentives, such as one to three months free rent if the tenant signs for more than two years?

One Squirrel Hill property manager who manages between 600 and 700 units in and around the Squirrel Hill and Shadyside communities for property owners, said the vacancy rate on units he manages has been climbing this year.

“Instead of 2 percent and 3 percent vacancies, we have 4 percent and 5 percent vacancies,” said Jerry Speer, a manager at Equity Real Estate Services in Squirrel Hill. “The vacancy rate is increasing because there are more apartments and we don’t have that many people coming in.

“Some of these apartments out here now are really nice,” he said. “There’s no doubt the rental market was booming. But it’s slowing down now. In the high-end rental market, I’m told that if the rent goes over $1,200 a month, it’s hard to get anything rented.”

Mr. Welles, of Ikos, said big developers are well aware that there is an oversupply of rental units in the East End, but they are making a long-term bet on the future of Pittsburgh.

“Developers know the prices they are charging now are too high, but they are betting long-term — 10 years from now — they won’t be,” Mr. Welles said. “These new units are too high-priced and there’s too many of them and it puts pressure on the smaller landlords that we serve.

“Our client base is much more flexible on pricing. The big developers need to make enough to keep their buildings afloat for the time being,” he said. “Over the next two to three years there is likely to be an oversupply of rental units at higher prices. But the city of Pittsburgh is growing. Things are picking up and demand will likely catch up to that supply.”

Meanwhile, in Lawrenceville, Mr. Schiappa is just glad he found something he could afford in the right location.

While the neighborhood attracts many young professionals for its bars, restaurants and active nightlife, he said the small apartment he moved into five months ago is also perfectly situated for someone working on a Ph.D in rehabilitation sciences at the University of Pittsburgh and working part-time at Bakery Square in Larimer.

“I’m not really attracted by the social atmosphere,” he said, “because I’m deep into my studies and working. This location is right in the middle of work and school.”