Real Estate

Apartment boom carries seeds of its own destruction: UCLA report

The dramatic rise in multifamily starts will continue for another two years as more credit starved individuals turn to apartment rentals, David Shulman, senior economist with the UCLA Ziman Center for Real Estate, suggested in a new report.

At the same time, the dramatic uptick in multifamily construction carries the “seeds of its own destruction” since rents will eventually exceed home prices, causing a dramatic shift away from apartment renting.

“The American Dream of homeownership may be comatose, but it is not dead, and the wake-up call will come in the form of higher rents,” Shulman wrote.

Still, the homeownership rate today is falling while multifamily demand is on the rise.

In 2005, multifamily starts hit 354,000 units before dropping to 112,000 in 2009. In the past three years, starts have doubled in the multifamily sector, hitting 260,000 units. Shulman expects multifamily starts to exceed 400,000 units in 2014 as more families unable to buy homes hunt for rental properties.

The boom in multifamily is supported by low vacancy rents that hover well under 5%, higher rents and institutional money flooding the sector looking for returns.

Shulman sees rents in New York and Los Angeles as over weighted with rents and renewals now rising 4% and publicly traded REITs are seeing 5% to 7% year-over-year rent increases.

“With 10-year U.S. Treasury yields below 2%, institutional investors are seeking out higher yielding alternatives and they are finding rental apartments to be increasingly attractive. Rising rents offer the prospect of higher future income and capital appreciation,” Shulman added.

But he believes 2014 will be a turning point with rental supply outpacing demand and more residents going back to the homeownership model due to its favorable affordability at that point.

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