Renters leased 700,000 additional apartments last year, more than doubling the five-year average. They also leased twice as many apartments in Q1 this year than in Q1 of last year, per our tabulation of RealPage data. This was fueled by residents decoupling (Avalon Bay reported 0.2 fewer residents per apartment) and relocations as tenant incomes grew 10% thanks in part to higher income people moving to more affordable areas.
Here is a look at 3 key trends that are supporting the thriving rental market and fueling rent growth:
1. A surge in household formation
A record 700,000 apartment units were leased-up in the 12 months through 1Q22, just in large apartment communities. That is more than double the nation’s historical norm for apartment demand. A surge in household formation is the driver behind this increase in absorption. Pent-up demand from college graduates who were still living at home through lockdown, roommates decoupling for more space, and just more people living alone all contribute to this increase in new households.
2. Record-high occupancy
Despite apartment deliveries hitting record-high levels, the 700,000 units leased far exceeded the more than 335,000 new units delivered in the 12 months through 1Q22. Occupancy reached 97.6% in the first quarter, the highest rate on record, and up significantly from 95.5% in 1Q21. Turnover rates are lower than ever too, as more renters chose to stay in their apartments due to higher market rents and moving costs. REITs also reported a decline in the percentage of move-out-to-home-purchase among those who did move out. With a nearly fully-occupied apartment market, owners have been able to increase rents aggressively.
3. Rising incomes
Rising incomes also support rent growth. Among renters who signed new leases, household incomes rose 10% YOY as of April 2022, which has helped renters keep pace with the 14% YOY average increases in asking rents. Rising incomes have also helped to keep rent-to-income ratios below 30% (the general rule of thumb when budgeting for rent is to keep annual costs below 30% of gross income). All apartment REITs we track reported rent-to-income ratios around 20% in 1Q22, despite steep rent increases both on new leases and renewals.
These trends all work together to support continued rent increases and fuel the investment market.
Apartments are a hot commodity among investors today because of the strong underlying fundamentals, and the desire for an inflation-hedged investment. There is more capital flowing into the sector than there are opportunities. More than $300 billion worth of apartment assets traded hands in 2021, a record amount by far. Many investors are taking advantage of fast-growing tertiary markets and value-add projects, where rents have plenty of room to grow.
Although we do expect rent growth to soften this year, it should stay above historical norms because of continued momentum in the market, particularly due to an expected decline in home buying demand. Additionally, many leases that are still on discounted rates from COVID concessions will be turned over this summer and those rates will be pushed closer to market value. These trends vary by market, and our team is staying on top of it.
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