Apartment rents declined in some of the country's priciest
cities during the third quarter, a dramatic reversal that could
signal the end of a six-year boom for the U.S. rental market.
Rents in San Francisco declined 3%, while they fell about 1% in
New York and edged lower in Houston and San Jose, Calif., the first
drops in those markets since 2010, according to apartment tracker
MPF Research. Across the U.S., rent growth was 4.1% on average.
According to a report by Axiometrics Inc., growth in the U.S.,
slowed to 3% in the third quarter from 5.2% in the year-earlier
period. The rate remains above the long-term average of about 2%,
the report said.
But growth has slowed for four straight quarters and now has
turned negative in key regions, suggesting the market has peaked
and is headed lower.
"San Francisco and New York are leading the way in the
downturn," said Ken Rosen, chairman of the Fisher Center of Real
Estate and Urban Economics at the University of California at
Berkeley. "People are going to be surprised that this is happening
but they shouldn't be. It's been too far, too fast."
The rental market is coming off its biggest boom in decades. The
foreclosure crisis, along with a trend toward urban living, has
created seven million new renter households since the
housing-market peak in 2006, as the homeownership rate declined to
51-year lows.
Apartment developers have flocked to downtown locations,
catering to affluent young professionals willing to devote bigger
chunks of their incomes to rent to be near restaurants and shops.
Across the country, rents have jumped 22% in urban areas since
2010, according to Axiometrics. High-end apartments now command a
45% premium over older ones, while historically they have fetched
about a third more, according to MPF.
But the same downtown areas that drove the boom are now the
deepest pockets of weakness.
"You're going to see red right in the middle of every market.
That's the one place where supply and demand are out of balance,"
said Jay Denton, senior vice president of analytics for
Axiometrics.
Some slices of the market are stronger. Rents for midprice
apartments across the U.S. are still up 4.9% from the year before,
according to MPF.
More affordable cities are seeing some of the strongest rent
growth. Rents in Sacramento shot up 12% in the third quarter, while
in Riverside, Calif., they jumped 7.9%, according to
Axiometrics.
The single-family home market has been strong as well. After
plunging 27% from 2006 to 2012, the S&P CoreLogic Case-Shiller
national home price index has surged to within 0.6% of its record
high.
The main cause of the rent slowdown is a flood of new supply,
with more than 555,000 units under construction across the 100
largest U.S. metro areas, according to MPF. Tenants also are
beginning to tighten their purse strings as rents have jumped by as
much as 60% in some markets since 2010. Growth of high-paying jobs,
meanwhile, is slowing in New York, San Francisco and nearby Silicon
Valley.
Almost 6,700 additional apartments are expected to be built in
San Jose and nearly 6,500 more in San Francisco by the end of 2018,
according to Axiometrics. New York is expected to get more than
42,000 new units during that same period.
At the same time, job growth is losing steam in some major
cities. San Francisco added 26,000 new jobs in August 2016, about
half the 47,000 jobs it added in the year-earlier period, according
to an analysis of Bureau of Labor Statistics data by Mr. Rosen.
Silicon Valley—the area south of San Francisco that is home
large technology companies like Google parent Alphabet and Facebook
Inc.— created 38,000 jobs in August, down from 54,000 jobs a year
earlier.
In San Jose, buildings such as the Ascent, which opened in
September 2015 with one-bedroom units starting around $2,500, are
now offering new tenants two months of free rent.
Eugene Korsunsky, president of Intempus Realty, a San Jose
real-estate brokerage firm that manages apartments and
single-family homes for landlords, said for the past couple of
years apartments sat on the market for about a week. Now it can
take him nearly a month to find a tenant, he said.
"We've actually had to drop the rent on some properties, which I
don't think I've ever done in my career," he said.
Tenants are even gaining the upper hand on renewals. Landlords
typically drive a harder bargain on such leases because they know
residents would rather avoid the hassle of moving.
Himanshu Khandelwal, a 24-year-old software engineer at Cisco
Systems Inc., negotiated a discount when he renewed his lease for a
three-bedroom house near San Jose that he rents with roommates.
With the lease set to expire at the end of August, Mr.
Khandelwal and his roommates looked around and found that
comparable places were cheaper than theirs. The landlord agreed to
knock $50 a month off the rent, roughly a 2% discount.
"We were so happy about it we went out for a few drinks," he
said. "We were expecting a hike."
In New York, a number of properties are offering two months of
free rent, including a Bjarke Ingels-designed project on
Manhattan's west side, which faces competition from dozens of
others opening in Manhattan, Brooklyn, Queens and Jersey City,
N.J.
A 440 square foot studio in the building leases for $3,700 a
month, steep even by New York standards. Dan Mogolesko, vice
president residential leasing and operations for the Durst
Organization, which developed the property, said he still gets
upward of 100 calls a day from interested tenants and brokers. But
getting those callers to sign a lease is growing more
challenging.
"A lot of large developers that have a lot of property are
certainly being impacted by this tremendous amount of supply," he
said.
Few large urban developers have said they are canceling projects
in the pipeline, but permits for new projects are down. A slowdown
in new construction could help stabilize the market by 2018 or
2019, but by then, economists said, there is a greater chance of
recession.
"We're late year-six, early year-seven of the recovery," said
Greg Willett, chief economist at RealPage, a property management
company. "That's about time for a recession by historical
standards."
Write to Laura Kusisto at laura.kusisto@wsj.com
(END) Dow Jones Newswires
October 04, 2016 17:25 ET (21:25 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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