The U.S. apartment vacancy rate fell to its lowest level in more than a decade, but persistent stagnant income growth for U.S. workers has tempered the ability of landlords to raise rents, according to an industry report released on Wednesday.
The national apartment vacancy rate fell 0.2 percentage points to 4.3% in the first quarter, the lowest since the fourth quarter 2001, according to a preliminary report by real estate research firm Reis Inc. Rents, on the other hand, grew by 0.5%, the smallest increase since the fourth quarter of 2011.
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Over the past five years, the apartment sector has been the beneficiary of the U.S. housing bust, the economic recovery, high mortgage requirements, and a constrained supply of new apartments. Those factors have pushed down the vacancy rate and allowed apartment owners, such as Equity Residential , Essex Property Trust Inc and AvalonBay Communities Inc to push up rents.
But rising rents may be bumping up against a ceiling of stagnant wages.
Wages have barely been keeping up with inflation, according to the latest data available from U.S. Bureau of Labor Statistics. Average hourly earnings rose 2.1% in February from a year ago, while the consumer price index was up 2%. February followed similar gains in January and December.
"At some point, you can't keep pushing these rent increases on since the majority of the tenants, if they're not getting income gains to keep up with that, it's just not sustainable," Reis economist Ryan Severino said.
While the housing sector rebound has not curbed the overall demand for apartments, it may be starting to nibble at the very high end. Unlike most would-be home buyers, these tenants tend not to be hemmed in by tough mortgage requirements that leave many others unable to buy homes.
They can and are choosing to buy, Severino said. Since the second half of 2010 through the first half of 2012, in buildings where the average rent was $3,000 or more, landlords have had to lower the rent to attract new tenants about 25% to 27% of the time. That jumped to 44 percent in the second half of 2012, as those high income earners used their dollars to own rather than for rental payments Severino said.
The 4.3% average vacancy rate in the first quarter was down from 5.0% the prior quarter and 8 percent from the cyclical peak in late 2009.
Forty-eight of the 79 markets that Reis tracks posted vacancy rates lower than the first-quarter average, with New York's 1.9% vacancy rate being the lowest. Memphis, Tennessee had the highest vacancy rate at 8.5%.
The average asking rent rose 0.5 percent in the first quarter to $1,102 per month. Factoring months of free rent and other perks landlords offer to attract tenants, the average effective rent also rose 0.5% to $1,054. Seattle saw the highest effective rent increase, up 1.5% to $1,078 per month. New York remained the most expensive place to rent in the United States with an average effective rent of $2,989, up 0.2%.
Federal cutbacks helped Washington D.C. register the only effective rent decrease, down 0.1 percentage point to $1,489 per month.
For the remainder of the year, Reis does not expect to see a significant uptick in the vacancy rate barring any economic downturn. It also expects rent growth to be consistent, with somewhat stronger growth in the traditional moving season in the second and third quarters.
(Reporting by Ilaina Jonas; Editing by Leslie Gevirtz)