Is six year apartment rental boom topping out?

Morris Beschloss, Special to The Desert Sun

After a booming six-year apartment rental market, which hit a low vacancy rate of 4.2% in 2014 and 2015, with a peak of rental prices reaching over 5% late in 2015, the current year seems to be marking a slowdown, especially in major U.S. cities.

While this is not yet indicating a major reversal in the switch from condos and housing ownership, a balance seemed to have been reached between unfulfilled demand, and apartment supply shortage. The first quarter 2016 building climbed by just 20,000 units, in comparison to the last five-year average of 40,000 during similar periods.

What may face the apartment surge with greater concern going forward is the one million apartments, throughout the U.S., in various stages of construction development. This comes on top of the 900,000 already constructed during the last three years. However, the upturn in vacancy rates during the first half of 2016, as well as the slowdown in effective rent growth does not yet indicate a reversal of the "red-hot" apartment leasing and rentals. It's more a matter of supply eventually outpacing demand.

Ironically, the benefits of lower rentals will most likely impact the most expensive apartments, which make up the lion's share of the construction now underway. These seem to be concentrated in New York, San Francisco, Denver, and Houston. With high rentals at their peak, the prospective renters or leasers of the most expensive apartments are already beginning to receive concessions, such as a month or more, rent-free, already noted in New York.

Like all types of building booms, the switch to apartment rentals from homeowning may have been overdone. However, as older retirees move back into major cities, from suburban locations, together with millennials, and generation Xers, not willing to take on mortgages, the major shift from homeowning, which spread over the period from post World War II to the beginning of the great financial recession in 2008, will not be substantially revived.

While America's determined population growth is also due to continue in the years ahead, the greater mobility of those entering the work force guarantees that renting-leasing will maintain its prominence in the big cities of the U.S., and even in some rural areas, in years to come.