Due to multiple events, including the pandemic and a surge in housing prices, apartment building investors continue to benefit from strong demand for apartment rentals. Here, we look at a few factors causing an increase in rents and how this could affect apartment building investors.
Will the Strong Demand for Apartments Continue?
The demand for housing, rising interest rates, and home values have many people committed to apartment living. We’ve seen occupancy rates soar above 95% in many markets across the US, giving apartment owners impetus to increase rents. Realtor.com suggests that rents surged by 10.1% in December of 2021 and are poised to continue to rise nationally in 2022 at a rate of 7.1%. With increased rents, apartment building investors should see an uptick in net operating income.
What’s Causing the Rise in Rents?
Good old-fashioned supply and demand is one reason for the rise in rents. But, there are other factors that are also responsible, including:
- Construction delays
- Rising interest rates
Let’s drill down into these factors and see how they affect the housing property sector, investors, and new construction.
The Bureau of Labor Statistics reported in May of 2022 that over the last 12 months, the Consumer Price Index increased 8.6%, which is the most significant 12-month increase since December 1981. More specifically, the increased costs of goods and services and the increased costs of building materials have significantly raised the costs of building all commercial properties. An increase in building costs means apartment renters will see an increase in rents.
Currently, the US is short over 5 million homes. We’ve been in a shortage for years, and the pandemic, inflation, and construction issues have only compounded the problem for new construction—the pandemic created supply chain problems and labor shortages that we’ve yet to overcome. Supply and labor shortages create project delays, as does obtaining construction permits for apartment buildings.
Developers will need to increase their construction budgets to account for rising costs of material and labor. Higher rents and valuation growth will provide developers and investors the capacity to move forward on construction. Building and project costs can be offset with an increase in rents.
The lack of affordable housing is even more severe than market-rate housing. Fortunately, many programs are available to attract developers to construct apartments with subsidized affordable housing components.
Rising Interest Rates
Interest rates are rising but are currently nowhere near the high of 21% back in the 1980s. That’s the good news. Rates are still at historic lows, but a rise of a point or two can be the difference between a family holding off on buying a home or being priced out of the market entirely.
As interest rates rise along with home prices, many families will continue to rent. Rising interest rates, of course, affect apartment building owners and investors. An increase in borrowing costs will increase rents. The future of apartment construction will exceed supply, and rents will continue to rise for the foreseeable future.
Take Advantage of Multifamily Housing Opportunities
The multifamily apartment sector looks to remain strong for 2022. Current economic conditions remain stable even as interest rates rise; low unemployment helps create a steady outlook.
Now might be the right time to obtain a loan to develop a multifamily apartment building. Contact LSG Lending Advisors today to talk further about rates, real estate development, and the multifamily apartment sector. We’re here to help you refinance of secure the loan you need for project success, starting with a free phone consultation.