Apartment Vacancies Rising

Posted by on Jun 13, 2016 in Blog - Commercial Investment Properties | 0 comments

Apartment Vacancies Rising

Why Are Apartments Going Vacant?

One thing you’ll notice as a commercial property investor is that apartment rent is commanding an all-time high. On the surface this sounds great. Your investment is generating a maximum return and the population is growing so there’s no end in sight to your windfall. As you can imagine, the situation isn’t 100% candy and roses. Tenants who are paying higher rent prices are doing so basically because they don’t have any other options. Those who do have alternative routes to take are exploring them however and apartment vacancies are on a considerable rise. There should be no alarm for investors, but it is an interesting trend to note. Demand will outweigh supply for most of our lifetimes but here are some reasons why the gap is tightening:

The Old Theory

Generation Y, or millennials, are who we look towards when it comes to rental data. In the past the common rhetoric slung around was that millions of millennials were living at home just waiting for the opportunity to move out. Supposedly the flexibility of their life also meant that they preferred renting instead of owning –great for investors but as it turns out simply not true. The first wave of millennials are reaching their early to mid 30s and they’re actually starting to get married, albeit later than any generation. Now loaded with a dual-income but yet with the penny-pinching mindset that the Groupon generation is known for, these couples are opting to buy instead of rent to actually save money.

Rental Demand is Slowing, Development Is Not

The housing crash was great for apartment developers at least as families left their homes and defaulted mortgages for more flexible living conditions. The demand for apartments surged and construction crews were ordered to put them up as fast as they could. When the market regained strength and their credit was repaired, these people once again became homeowners. The work orders for construction were still there, but the tenants no longer were. In the first quarter of 2016, apartment occupancy rose by less than half of what it has in recent years while builders finished over 200,000 units last year – the most since 1988.

Rent Costs Are Still Rising

With the increase in vacancies, the normal assumption would be that costs are lowering per the theory of supply and demand. That’s not true at all however as rent costs are on the rise at about 4.6% annually. Granted the economy is improving and the labor market is tightening, but 1 in 5 of the 43 million U.S citizens who rent are doing so with over 1/3 of their income, or what they call being ‘cost burdened.’

What Does it All Mean?

For years investors looked at apartment investing as the Golden Goose, a purchase with unlimited rent prices and a list of hundreds if not thousands of potential tenants beating down your door. Trends are saying that’s no longer necessarily the case and it may be much more of a sounder decision to invest in the commercial avenue.

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