Is the Rental Housing Market Headed for a Fall?

Last modified on November 13th, 2014

When The Modern, a luxury high-rise apartment building in New Jersey announced recently it was opening its leasing office, more than 2,000 potential residents had already expressed interest in renting one of the 450 units. Allen Goldman, president of SJP Residential Properties, attributes the positive response to regional demand and existing inventory conditions.

Goldman says the aging local inventory played a significant role in the “unprecedented response”. He also claims that even with record building in the Gold Coast area, he isn’t concerned about saturation at this point because the area is experiencing a steady influx of renters trying to escape escalating rents in Manhattan and Brooklyn. Another factor driving demand is the increasing expectation for high-end appliances and decorating options. As people put off buying homes, they want rental housing options furnished with higher quality fixtures and built-ins.

Some industry experts are starting to “wonder out loud” whether the rental market is nearing the peak, while others say that even if the market starts to level off, there is no reason to think the market has topped out yet. William Procida, founder and president of Procida Funding and Advisors, cautions that while construction costs continue to rise, rent increases aren’t necessarily rising at the same pace. Concerns that ROI won’t match expectations has some project managers approaching new construction more cautiously than last year.

On the positive side, reports from the US Census Bureau that indicate homeownership rates continue to fall offers property managers and rental property investors some hope that the market hasn’t peaked just yet. Homeownership rates dropped in the second quarter to the lowest level in almost 20 years – 64.7% – and mortgage requirements are still tighter than they were a few years ago.

As long as Millennials embrace an active urban lifestyle and boomers continue to look for smaller retirement homes, the rental market should continue to thrive – at least in the near term. Quoting Peter Boockvar (CMS The Lindsey Group), Yahoo Finance contributor Adam Samson reported recently that as long as homeownership rates continue to decline the multi-family story will be positive.

And, there is evidence that real estate investors who traditionally haven’t been “big players” are entering the multi-family housing market. The largest single-family “landlord” in the United States (Blackstone Group – NYSE:BX) has added multi-family holdings to their portfolio in recent years.

While some metropolitan areas are still seeing skyrocketing rents and impressive construction numbers, rural areas and smaller towns may reach saturation sooner. Is the rental market heading for a fall? Current research says not immediately, but it is imperative to realize that demographics will continue to drive the train. As Millennials age and lenders review their mortgage policies, conditions will likely change. The bubble might not burst, but a slow leak is definitely a possibility.

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