[REN #128] Apartment Construction Boom May Soften Rental Prices

Rental demand is intense across the country, and there’s a new apartment construction tsunami sweeping the nation. Rent Cafe says we can expect to see 350,000 new units available for rent by the end of the year. And that could have a cooling effect on some of the hottest rental markets.

They also say that the number of apartments being built this year is a whopping 50% increase from last year. Apartment construction has been modest in the wake of the Great Recession, but the blog says with a growing renter pool and strong job growth, demand is strong and apartment construction is at a ten-year high.

In 2006, just ahead of the economic meltdown, 140,000 new apartments were built in the U.S. That number increased to 182,000 in 2009 toward the beginning of the Great Recession. But then, it dropped to just 76,000 in 2011 as the economy struggled for a footing. It’s increased steadily from that point, to an expected 321,000 units this year.

As the rental demand continues, either by necessity or by choice, developers are taking advantage of the opportunity. Complexes are rising quickly in areas that people are flocking to for high-paying jobs and many of those would-be renters, are millennials, who prefer the flexibility of renting.

Rent Cafe used data from its sister company, Yardi Matrix, to find out more about the “apartment construction pipeline” in 50 of the largest U.S. cities.

At the top of the list of apartment construction boomtowns are two cities in Texas. Houston and the greater Houston area will see 26,000 new apartments in 95 new rental developments. Two of them will have more than 400 units each along with coveted amenities like fitness centers, Zen courtyards, lap pools, social lounges, massage rooms, and pet playgrounds.

Dallas, which is second on the list, will see 23,000 new apartments this year. Austin and San Antonio are also on the top-20 list. Total apartment construction in Texas this year will represent 22% of the total for the nation. But census data also shows that Texas has the fastest growing population. Last year, the Lone Star state gained 412,000 new residents.

As for the rest of the U.S. — New York is right up there in the number three spot, for apartment construction. The Big Apple will gain an impressive 21,000 rental units.

California also has four metro areas on the list including Los Angeles, San Francisco, San Jose and San Diego, in that order. Other cities include Washington, D.C., Seattle, Miami, Atlanta, Denver, Charlotte, Phoenix, Chicago, Boston, Orlando, and Nashville.

So what are developers building in terms of apartment size?

Rent Cafe says that one-bedroom apartments make up the biggest share of the new rentals. 51% of them will be one-bedroom apartments. Another 37.5% will have 2 bedrooms. 6.8% will have three or more bedrooms. Lowest on the preference list are studios. They will account for just 4.7% of the new units.

In addition to providing much-needed housing, this wave of apartment construction is also cooling off rental pricing in some areas. Skyrocketing rents are the result of high demand and low inventory. So as inventory increases, and demand tapers off, rents ease up.

Rent Cafe says that stepped up construction over the last few years has lead to smaller year-over-year rent increases in metro areas like Denver, Houston, Washington, D.C., and Boston.

In Houston, there’s been some softening in job growth due to cuts in energy and mining. But population growth and new construction are strong in Houston and rents are still rising. In 2015, they were up 3.6%. That’s why Houston is one of the cities on the Real Wealth Network list of great places to purchase single-family rentals, which are also in high demand.

When it comes to rental demand and pricing, inventory, population growth and job growth are all important factors. And Texas is a winner in all three of those categories.

Rent Cafe says Dallas tops the nation’s chart with a 3.9% job growth rate for the 12-month period ending in March. And it says that Dallas shows no signs of slowing down. Rents in Dallas are expected to rise 7.3% this year.

On the flip side of the coin, some U.S. cities will see very few new apartments this year. Sacramento is one of those cities. It will have just 730 new units available this year. That’s the lowest number on the list and a 30% decrease from last year.

Actually, Rent Cafe does list one more city at the very bottom of the list. It says that developers are not building a single new apartment in Providence-Warwick Rhode Island this year.

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