Low Rental-Vacancy Leading to Increased Rents

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With demand outpacing construction and more Americans preferring to lease instead of buy, the U.S. is undergoing one of the worst rental housing shortages in over a decade, which is giving benefits to corporate landlords.

For the first time since 2001, there’s an undersupply of single-family homes and apartments to rent, according to Freddie Mac’s chief economist Frank Nothaft. His analysis reveals that the third quarter’s deficit was about 350,000, which is the most in 14 years.

“We have rentals in the Saint Louis metro and demand for rentals is as strong as it has been in over 10 years,” says Bryan Schroeder, Owner, FasterHouse Property Management. “We are raising rents slightly and keeping our vacancy rate below 7%. A lot of our renters were homeowners eight years ago and lost their homes to foreclosure and have no choice but to rent for the next several years. This combined with the traditional younger renters is keeping the rental market for single family homes very strong.”

Consequently, institutional investors are getting the upper hand. A balanced market — with neither tenants nor landlords having the upper hand — has a rental-vacancy rate of 8.2%, according to Nothaft. Census Bureau data reveals that in the third quarter, the rental-vacancy rate fell to 7.4%.

“It’s that supply-demand equation that allows us to get aggressive about raising rents,” said American Residential Properties Inc.’s chief executive officer Stephen Schmitz, who is also a landlord with more than 8,500 homes. “Three years ago, you would go to raise somebody’s rent and they could say, ‘I’ll go down the street and pay $100 less than I’m paying you now.’ But today they can’t because all those houses down the street are occupied.”

Since 2012, institutional investors have spent over $25 billion on single-family homes, which they rent out. Although the market for apartments has been in the favor of landlords for half a decade, owners of houses are now able to reduce turnover and increase rents.

Looking forward, institutional single-family landlords are going to prioritize raising rents next year, once they learn to maneuver the market’s new landscape, getting a better grip on how higher rates affect their pace of leasing, explained a JPMorgan Chase and Co. analyst.

It’s also highly likely that rental-vacancy rates will remain low, which means that this could be how the market works for awhile.

“Many of [the average families looking to rent] saw their parents lose their home, and they’re a little bit disillusioned,” said American Homes 4 Rent CEO David Singelyn. “How long will that last? I don’t know. But today there’s a significant movement to becoming a renter nation as opposed to an owner nation.”

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