We’ve previously reported that the average amount one pays in rent has been rising and is projected to rise further in the next few years Are Rents Heading North? as the millions of homeowners losing their properties to foreclosure will increase the demand for rental housing. Further increasing this demand is the fact that more people are choosing to stay renters because they no longer believe that owning a house fits their goals. These things, coupled with the reality that little housing was built in the past few years due to investor concern and the lack of financing, may cause you to think that the future looks bleak for those who will be renting for many more years. But this may be one of the few instances where you'll be genuinely happy to learn that you're wrong.
Our free market system, which relies on investors to capitalize and profit on opportunities, is back and strong in the apartment sector. Due to the forecasted shortage of rental units, which translates into higher rents, which then translates into the possibility of extraordinary profits for investors, those investors are flooding money into the building of new rental properties. This means that new properties will be coming to market over the next few years, increasing supply, which in turn should decrease rental rates, or at least slow the rise in rental rates.
With money flooding into the apartment-building sector, investors are buying land or moving forward with construction on land they already own, hoping to capture some of those forecasted rents and investment returns. However, as more investors build more properties, rent increases will slow down until they stall completely when supply finally catches up with demand for rental properties. This isn't necessarily good news for investors, but for renters, it's great tidings — you should still be able to secure a nice, new apartment at a reasonable rental rate!
But how do we know that investors are jumping into the game and driving up the supply of rental properties? For one, this article, Demand for Rentals Drives Big Rise in Home Building from the Wall Street Journal, notes that housing starts were up 24.3% from the November 2010 figures. Housing starts include single family homes, town houses, condominiums, and multifamily apartment developments. So the composition of those housing starts will give us insight into whether or not units are being added to the rental pool. Single family homes are not really built for the rental market, but the other types of residential development, especially multifamily apartments, are only for renters. In addition, the increase in residential development of two or more units increased 25.3%, while single family homes barely budged with an increase of only 2.3%, according to the same Wall Street Joural article. There should be several million new rental units hitting the market over the next five years if this trend continues.
With investment capital flowing back to the rental unit and apartments sector and building marketplace, predicted rental rate increases should ease as units are finished in the upcoming 12 to 48 months. And if history is any guide, real estate investors will probably flood the market with too much money, which should cause an overabundance of units to be built over the following five years, further increasing supply, and most importantly to renters, reducing rents.
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