CREJ - Multifamily Properties Quarterly - July 2015
I t would be an understatement to say that these are good times for the apartment industry. For most in the industry, they are probably the best in their lives. Capital is abundant and growing demand is outpacing increases in supply even as new units come on line. And there’s reason to believe there is a significant amount of pent-up demand still to come into the market. To the outside world, though, it all consolidates into one conclusion – rents are rising. Metro area rents were up 13 percent year over year as of April, according to the Apartment Association of Metro Denver. We have seen the headlines around the country and locally about double-digit rent growth. Our success makes us easy targets for inclusionary zoning or rent-control proposals championed often by well-intentioned advocates seeking to address the affordability gap. They hear about rising rents and want a solution, often unaware of the real costs and unintended consequences of many of these so-called easy and no- or low-cost solutions – namely, even higher rents and less supply. So, how should we, as an industry, be talking about rents and affordability? First, today’s strong rent growth is a temporary situation in what is a highly cyclical market, driven by factors largely outside of the industry’s control. The collapse of the U.S. financial markets in 2008 virtually shut down new apartment construction for several years, severely constricting supply at a time when rental demand was about to surge. Second, apartment construction is ramping up. As those units are delivered, rent growth will moderate. But even with more apartments in the pipeline, construction activity remains below the level needed to meet rising demand. Many nonfinancial obstacles to new development, such as unnecessary and duplicative regulations, outdated zoning policies and not-in-my-backyard opposition to apartments, continue to stifle new construction and raise the costs of the properties that are built, contributing to higher rents for our residents. Third – and this may be the most important fact – America’s affordable housing shortage is more than just a housing problem. It is not only the fact that rental housing is more expensive to produce and operate, but also there are other economic factors that have suppressed household income growth. Housing affordability is really about housing costs in relation to income. On an inflation-adjusted basis, median renter household income today is virtually the same as it was in 1981. Because income stagnation is such a large part of the equation, we simply cannot build our way out of this affordable housing shortage. In fact, in many markets where demand is strongest, even if, hypothetically, developers agreed to take no profit, the cost to build still exceeds what people can afford to pay. In addition, housing affordability is an issue for homeowners (and would-be homeowners) as much as it is for renters. This is often overlooked by media who spotlight rising rents, but cheer rising house values. When we compare Denver renter and owner affordability by income categories (so that similar households are compared), we find strikingly similar affordability burdens for each group. For example, if we compare renter households and owner households earning 80 to 99 percent of area median income, we find that 33 percent of renters are paying more than 30 percent of their income (U.S. Department of Housing and Urban Development’s benchmark for cost-burdened households) and 31 percent of owners are doing the same. This pattern, as shown in the chart, reinforces the notion that our housing affordability issues are not just a renter issue. A long-term solution to rising rents requires meaningful income growth and the removal of many barriers to apartment construction. State and local governments have a number of tools available, and the federal Section 8 voucher program could also be better leveraged to address today’s affordability issues. The preservation of existing affordable housing also is critical. By finding ways to keep more properties as a viable part of the overall apartment stock for longer, we can add to the available supply of housing, thus reducing the pressure on rents. This is the message the National Multifamily Housing Council is taking to policymakers at all levels. And it’s one we hope apartment firms will help spread as they talk to reporters as well as state and local officials. Through the use of advertising tools, national, state and metro area economic impact data, and the creation of an interactive apartment economic impact calculator at weareapartments.org, renters and industry professionals are educated and remain current on the multifamily housing market.