Apartment rents are up, but can it last?

August 26, 2015 admin

Typical San Francisco Neighborhood, California

It’s a good time to be an investor in apartments.

Rents are up strongly in markets across the country, according to Zumper, an apartment search service, but especially in the San Francisco Bay Area, where a hot tech market is pumping up the apartment market.

Zumper’s August 2015 Rent Report finds the highest asking rent in the country is in San Francisco, where the median one-bedroom apartment is offered for $3,500 per month — a 12.9 percent increase over the past year, and more than the median monthly rent in New York City ($3,100), Boston ($2,250), San Jose ($2,230) and Washington, D.C. ($2,150).

The incredibly hot San Francisco market is having knock-on effects on neighboring Oakland, which recorded the highest year-over-year jump at 20.0 percent for a one-bedroom unit ($1,980) and 26.3 percent for a two-bedroom unit ($2,400).

But these sharp increases — pushed up by an improved employment situation and rising wages, as well as a decline in the homeownership rate post–global financial crisis (as lenders tighten terms and would-be buyers remain leery of owning) — may be unsustainable over the long term, as these high rents are increasingly unaffordable.

According to a report from Zillow, renters making the median income in the United States would spend 30.2 percent of their income to rent a median-priced apartment in the second quarter (up from 29.5 percent in 2014). The least affordable metro area is Los Angeles, where it takes 48.9 percent of monthly income to rent, followed by San Francisco (46.7 percent), Miami (44.5 percent) and New York City (41.3 percent).

By contrast, low interest rates have made mortgages more affordable than ever, and buyers in the United States spent 15.1 percent of income on mortgage payments. (An exception is, once again, the very hot Bay Area market. Home buyers in San Jose spent 41.9 percent of income on housing, on par with the 41.5 percent spent by renters.)

Should investors in apartments be concerned about decreasing affordability? Will renters move back into homeownership?

And what happens to the San Francisco Bay Area’s apartment market if the tech industry moves into a slump?

Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.

LorettawebfinalLoretta Clodfelter is editor of Institutional Real Estate Americas.

Previous Article
Top 10 U.S. retirement destinations
Top 10 U.S. retirement destinations

Ever dream of what you’ll do in retirement, and where you’ll want — or need...

Next Article
Consolidating power
Consolidating power

Every year, Institutional Real Estate, Inc., teams up with Property Funds...