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Where Are All the Middle-Class Rentals? (6/24/15)

The rent affordability crunch moves up the economic ladder as most new apartments are built to luxury specs

by Patrick Clark

Ryan Dravitz and a roommate shared a spacious apartment in Denver, paying $1,200 a month for 1,200 square feet in a high-rise building a mile from the center of downtown. Then, in 2012, the rental market exploded. The roommate moved out, and Dravitz, 26, moved into a house with four others. His old apartment is now renting for $2,000.

“Luckily, I got engaged recently, so we have a dual income,” said Dravitz, a bank teller and freelance writer and editor. Even so, it’s unlikely the couple will be able to afford to stay downtown, where rents are rising rapidly, and new rental buildings with such amenities as golf simulators and dog spas are becoming increasingly common.

Skyrocketing rents and multiple roommates—these are the kinds of war stories you expect to hear in space-constrained cities such as New York and San Francisco. But the rental crunch has been steadily creeping inland from coastal cities and up the economic ladder.

“For lower-income households, affordability has been a problem for decades,” says Stockton Williams, executive director at the Urban Land Institute’s Terwilliger Center for Housing. “Now you have people in middle-income, two-earner households who are paying unsustainable rents.”

For builders, the logic is clear. Profit margins are often better at the high end, and costly such amenities as floor-to-ceiling windows and high-end appliances help entice new tenants—as long as there's a market of renters who can afford the pricier digs.

“When you build something new, you want to push the quality up to give people a reason to move up,” says Cary Bruteig, a partner at Apartment Insights who tracks the Denver market.

Here's the vicious circle that's sending rents spiraling higher:

1.People paying high rents have a harder time saving for a down payment, preventing tenants from exiting the rental market.

2.Low vacancy rates let landlords raise rents still higher.

3.Developers who know they can command high rents (and sales prices) are spurred to spend more to acquire developable land.

4.Higher land costs can force builders to target the higher end of the market.

Real estate developers in the U.S. started work on 360,000 new apartments last year, the most in more than 25 years, though not necessarily on homes most Americans can afford. In 2013, the median rent for a new apartment was $1,290, about 50 percent of the median renter’s monthly income, according to data published today by Harvard’s Joint Center on Housing Studies. Eighty-two percent of the new units completed from 2012 to 2014 were luxury apartments, according to CoStar Group research cited by the Wall Street Journal.

In Denver, the story of the rental affordability crunch starts at the tail end of the housing boom, after the easier path to home ownership had curtailed demand for new rental apartments. The local economy roared to life after the recession, workers flocked to the city, and rental prices shot up. Rents rose 10.2 percent last year, according to a February report from Zillow, the third-highest rate among U.S. cities, after San Francisco and San Jose.

Developers moved to soak up the new demand. Based on projects currently under construction, developers will have added close to 11,000 apartments within 1.5 miles of the city center from 2010 to 2016, according to an estimate by Ken Schroeppel, founder of the DenverInfill blog, which tracks new construction. About 96 percent of those units are rentals.

In addition to higher absolute rents, apartment dwellers are paying more for less. Two-thirds of new apartments built in Denver from 2010 to 2015 were one-bedrooms or studios, compared to just under half from 2000 to 2009, according to Pat Stucker, managing director at Jones Lang LaSalle's Denver Capital Markets group. Downsized apartments include new pie-slice units at Turntable Studios, a circular building that was once a downtown hotel. The smallest are 330 square feet and rent for up to $1,000 a month.

In a perfect world, affluent renters would trickle up into new, luxury units, while rates on plainer units would come down or stay the same. But the vacancy rate on Denver apartments is just 4.3 percent, according to Bruteig. Until that number rises, demand is likely to keep rents high.

The same dynamic holds true nationally, as the share of Americans who rent their housing is at a 20-year high and likely to keep rising. A report earlier this month from the Urban Institute predicts that 59 percent of new households formed from 2010 to 2020 will rent.

“The real question," says Stucker of Jones Lang LaSalle, "is how long can that last before you reach a level that is not affordable to the majority of the demographic that you’re trying to service."

http://www.bloomberg.com/news/articles/2015-06-24/where-are-all-the-middle-class-rentals-