Spotlight on First Quarter Regional Rental Market Conditions

Spotlight on First Quarter Regional Rental Market Conditions

Although the declines in national vacancy rates suggest somewhat tighter markets, rental market conditions varied throughout HUD’s 10 regions in the first quarter of 2016. The Northwest Region had one of the nation's tightest rental markets, while the Southwest Region's metropolitan areas maintained mostly balanced to slightly soft rental markets.

As more people have looked to rental housing as an alternative to homeownership over the past 8 years, researchers have renewed their focus on the importance of rental market conditions in analyzing the overall housing market. Researchers and policymakers have noted that in many areas of the country, rents are rising rapidly, which has put added pressure on housing affordability in certain regions and metropolitan areas. To better understand this trend, one of the main statistics to observe is the vacancy rate and how it reflects apartment market conditions and possible changes to overall rents. Decreasing vacancy rates mean that the demand for housing is rising or that the supply of available units is falling. When demand outpaces supply, rental prices often rise because prospective renters are competing for the limited supply of available apartments.

According to the U.S. Census Bureau, the national rental vacancy rate, which reflects the rental vacancy rate for single-family homes, condominiums and cooperatives, and apartments, was 7.0 percent in the first quarter of 2016, unchanged from the fourth quarter of 2015 and down from 7.1 percent in the same period a year earlier. For single-family rentals, the vacancy rate was 6.9 percent in the first quarter, down from 7.3 percent in both the previous and year-ago quarters. The vacancy rate for multifamily rentals (five or more units) was 7.4 percent, up from 7.0 percent in the fourth quarter of 2015 but down from 7.5 percent in the first quarter of 2015.

Although the declines in national vacancy rates suggest somewhat tighter markets, looking at the regional trends is also useful. In the first quarter of 2016, the Northwest (HUD’s Region 10) had one of the nation’s tightest apartment rental markets, with conditions ranging from very tight to balanced, according to HUD’s analysts. Average monthly rents rose in nearly every metropolitan area in the region, led by Portland’s year-over-year increase of 13 percent and Seattle’s annual increase of 11 percent. In Portland’s case, the increase in rent occurred when vacancy rates actually increased from 2.5 percent to 3.0 percent, suggesting that rising vacancy rates alone do not prevent rent increases. Nevertheless, HUD’s analysts consider Portland’s rental market to be very tight, so increased rents should be expected.

Unlike the mostly tight rental markets in the Northwest, the metropolitan areas in the Southwest had mostly balanced to slightly soft markets in the first quarter of 2016. Though most metropolitan areas in the region had balanced apartment markets, San Antonio’s conditions were slightly soft, with a vacancy rate of 10.7 percent. Even Houston, generally perceived to be a booming city in many national narratives, had a slightly soft apartment market with a 9.7 percent vacancy rate, up from a vacancy rate of 8.7 percent in first quarter of 2015. Some observers believe that Houston’s rental market may continue to struggle with increased vacancies; more rental units are expected to enter the market at the same time as a decline in oil prices has reduced employment in the area. Despite their slightly soft markets, rents in San Antonio and Houston still increased by 6 percent and 5 percent, respectively, as a result of new additions.

Although cities such as Portland may be experiencing very tight apartment markets while others, such as Houston, experience slightly soft markets, other metropolitan areas have balanced markets, even if many would not expect it. For instance, in the Mid-Atlantic region, the city of Washington, DC, had a balanced apartment market in the first quarter of 2016, with a vacancy rate of 5.8 percent and a year-over-year rent increase of 3 percent. Conditions in the city were balanced even in the face of high demand because of the recent completion of a large number of new apartments.

Ensuring that the supply of housing keeps up with demand is a goal for many policymakers, who have seen rents in their cities rise to levels unaffordable to many prospective or current residents. Many analysts suspect that the national vacancy rate for apartments will increase in the coming quarters and years as current properties under construction are completed and enter the market, which should help ease rental affordability. However, the rate at which the rental stock may increase varies from market to market, which means that high rental costs may continue to put pressure on households’ finances for some time.