Apartment construction rising, and so are rents
By DEREK KRAVITZ The Associated Press November 20, 2011 5:36PM
This Oct. 18, 2011 photo, shows two new home developments in Canonsburg, Pa. U.S. builders started slightly fewer homes in October but a wave of apartment construction is being planned, a good sign for the struggling housing market. (AP Photo/Gene J. Puskar)
Updated: December 22, 2011 8:05AM
WASHINGTON — Builders have found a way to make money in a decrepit home market: apartments.
The number of permits to build apartments jumped to a three-year high last month. In 12 months, they’ve surged 63 percent.
Blame the housing bust, which left many people without the means, the credit or the stomach to buy. More people need apartments. The demand has driven up monthly rents. And apartment builders are rushing to cash in.
That said, the overall home market remains depressed. Builders still are struggling. They broke ground on a seasonally adjusted annual rate of 628,000 homes last month, the government said last week. That’s barely half the pace that economists equate with a healthy market.
High unemployment, stagnant pay and waves of foreclosures have slowed sales of single-family homes, which make up about 70 percent of the home building market. Apartment construction may be surging, but it’s a small portion of the industry.
More apartment building won’t add enough jobs to reduce unemployment or hasten an end to the housing crisis. Still, it’s contributed to the overall economy’s growth for two straight quarters. And many economists expect apartment construction to grow for at least the next 12 months, as long as the economy avoids another recession.
“You’re not going to see apartments as an economic driver,” said James Marple, senior economist at TD Economics. “But it’s renters who are clearly going to drive the demand for housing.”
It’s also worth keeping the increase in perspective: The growth in apartment construction is coming off extremely low levels. Last year, for example, only 146,000 apartments were built. That was the fewest since 1993. This year’s pace isn’t much more.
By comparison, in 2005, just before the housing market went bust, 258,000 apartments were built. Some signs suggest that builders could match that level over the next few years.
One such sign: Permits for apartment buildings, a gauge of future construction, have jumped more than 60 percent over the past year. That compares with just 6.6 percent growth in permits for single-family construction over the same period.
“The demand is there,” said Mark Obrinsky, chief economist at the National Multi Housing Council. “Rents have recovered, much of them to where they were before the recession.”
Still, fewer home buyers mean more people must rent. Nearly 4 million new renting households were created between 2005 and 2010, according to Harvard’s Joint Center for Housing Studies. Under normal economic conditions, that’s more than 10 times the number of new renters who would be expected in a five-year span.
Homeownership has fallen more over the past decade than in any other 10-year stretch since the Great Depression. Approximately 65 percent of Americans own homes. That’s down from a peak of nearly 70 percent in the middle of the decade.
As more people have become tenants, landlords have felt emboldened to raise rents.
The average rent in the United States has risen 2.4 percent over the past 12 months to $1,004 a month, according to the real estate data firm Reis Inc. Over the previous year, rents rose just 1 percent. Between 2008 and 2009, they actually fell 2.7 percent.
AvalonBay Communities Inc. has raised rents by an average of 6 percent in the past year. The company earned 11 percent more in rental revenue in the July-September quarter than in the previous quarter. With nearly 54,000 units, AvalonBay is one of the largest apartment developers in the country.
At Equity Residential, whose chairman is real estate magnate Sam Zell, rental income jumped 12.7 percent in the July-September quarter over the same period a year before.
Equity Residential is the nation’s largest apartment owner. Nearly 25 percent of its apartments are in Phoenix, Orlando and South Florida, which were hammered by the housing bust and where its average rents are the lowest.
Zell, whose net worth is approximately $5 billion, has publicly extolled the prospects for his apartment business over his office and retail operations.