Rental market conditions, like vacancy rates in luxury rentals and scarce affordable housing, prompted state and local governments to offer incentives for developers focused on lower end properties, creating a rare investment opportunity.
The recent State of the Nation’s Housing report illuminated rising vacancy in luxury rental units and a shortage of affordable rental housing in the U.S. As investors continue to focus on building luxury apartments they might be missing out on opportunities to spend less developing rentals for blue-collared and moderate-income earners that are in record high demand.
The national median rent rose 61 percent between 1960 and 2016. Coupled with weak income growth among low- and moderate-income households it’s an unfortunate truth that the cost-burdened share of renters doubled from 23.8 percent in the 1960s to 47.5 percent in 2016.
One of the reasons for this gap is that rent in older buildings hasn’t filtered down to more affordable rates while new rental construction has focused on the high end of the market. A study from the National Low Income Housing Coalition found that those making federal minimum wage ($7.25) can’t afford a two-bedroom rental anywhere in the country working a 40-hour week.
Minimum wage earners would need to work 122 hours a week (with no vacations) to be able to afford a two-bedroom rental. That’s 70 percent of their total week spent at work. With what’s left there’s barely time to sleep, let alone care for a family. This is also a possible explanation for the doubling of the number of households composed of unmarried adults living together (related or otherwise) from 4.6 million in 1987 to 9.2 million in 2017.
Despite the fact that the number of low-income renters grew by 6 million, the number of low-income renters receiving assistance rose only to 950,000. Funding for federal rental assistance programs failed to meet the higher costs per voucher because of the widening gap between renter incomes and fair market rents. State and local governments are doing what they can to make up for lack of federal funding for rental assistance by, “raising new revenues through bond issuances, real estate transfer taxes, and linkage fees, as well as using their regulatory powers to incentivize or mandate inclusion of affordable units in new market-rate developments.”
Vacancy rates among brand new luxury units are over 5 percent and have continued to climb over the past few years, indicating a shift in rental market conditions. There’s a unique opportunity here for investors to develop lower end properties that come with a built-in demand and take advantage of incentives local governments might offer.