Landlords of upscale properties across the U.S. are bracing for rough conditions in 2017 that will likely force them to slash rents and offer deep concessions as a glut of supply brings a seven-year luxury-apartment boom to an end.
The turnaround follows a more-than-26% jump in U.S. apartment rents since early 2010, far outstripping inflation and income growth. But in 2016, rents rose a modest 3.8%, a significant drop from the recent high of 5.6% year-to-year growth in the third quarter of 2015, according to a report to be released Tuesday by MPF Research, a division of RealPage Inc. that tracks the U.S. apartment market.
Developers in New York are already offering up to three months of free rent on some projects. In Los Angeles, some landlords are offering six months of free parking, and some in Houston are waiving security deposits. Meanwhile, MPF Vice President Jay Parsons said he expects little or no rent growth in urban rental markets this year.
“This will be a very challenged leasing environment almost everywhere,” Mr. Parsons said.
More than 50,000 new units were rented by tenants in the fourth quarter in the U.S., six times the number in the year-earlier period. But that demand was overwhelmed by the 88,000 new units that were completed in the quarter, the most since the mid-1980s, according to MPF.
That gap looks set to widen in 2017. More than 378,000 new apartments are expected to be completed across the country this year, almost 35% more than the 20-year average, according to real estate tracker Axiometrics Inc.
The New York area alone will be flooded with nearly 30,000 new apartments in 2017, double the historical average, according to Axiometrics. Roughly 85% are luxury units.
Dallas is expected to see nearly 25,000 new apartments delivered, compared with the long-term average of roughly 9,000 new apartments a year, according to Axiometrics. Los Angeles is expected to get roughly 13,000 new apartments, nearly double the historical average.
Nashville could see some 8,500 new apartments, more than triple the typical 2,400 apartments completed annually.
John Tirrill, managing partner at SWH Partners, an Atlanta developer that has several projects under way in the Nashville area, is leasing a new five-story property with a fitness center, yoga and barre studio and swimming pool. He has lowered rents from $2.25 a square foot to $2.10 a square foot—a $150 discount on a 1,000-square-foot apartment—and is offering one to two months of free rent.
Banks are pulling back on lending, which could help slow the pace of construction starting in late 2018.
“We’re just being really selective,” said John Cannon, a senior vice president at Pinnacle Financial Partners, a Nashville-based financial-services company that has increased its focus on multifamily lending in the last couple of years. “Multifamily has a large number of units on the ground that they really have to demonstrate some absorption.”
2017 Real Estate Synopsis
- New home sales and existing home sales are already slowing because of mortgage rates.
- A huge supply of apartments will come online in 2017.
- Banks are tightening lending standards for apartments.
- Mall space is hugely overbuilt.
Mike “Mish” Shedlock