The number of renters in the United States has soared in recent years. In fact, according to RentCafe, the renter population now stands at 107 million and renters make up over one-third of the population. Most renters are clustered in urban areas where it's often prohibitively expensive to buy a home. Often these renters are millennials who have moved to large cities for work or school.
This year's widespread work-from-home movement has caused some renters to move home to their families and others to move to cities where rents are lower and they can buy a home. As of September, 25 million people ages 18 to 34 were living with parents or relatives, and that is likely to remain constant for a bit longer.
Because of this rents have fallen in nearly half of the major cities in the U.S., but what is most striking is how it has impacted San Francisco and New York. San Francisco, which has been one of the most expensive cities in the country over the past five years, has seen prices drop dramatically. The price of a studio apartment is down below $2,000 per month, a level not seen since 2011. Vacancy rates and the number of listings, especially for high-rise apartments, are rising, putting additional pressure on rents in the city.
A report from Apartment List revealed that rents in New York City are down 15.3% since March, behind only San Francisco, where rent growth fell by 21.7%. Apartment vacancies in Manhattan are at a rate that hasn't been seen in 14 years. All of this creates a tough situation for landlords in big cities, which begs the question: Is it time to head for greener pastures?
Bounce to Boise?
Even before the COVID-19 pandemic, real estate investors were becoming increasingly interested in secondary and tertiary real estate markets simply because the price of real estate in major cities was becoming prohibitive. The city that has seen the most rent growth according to Apartment List's data just happens to be one that was on our radar back in February 2020, Boise, Idaho.
We identified Boise as a location for investment for a few key reasons including rising population and growing jobs. There's also another factor that makes Boise a prime rental market: higher home prices. September data from Boise Regional Realtors pegged the median price at $409,945 and inventory was whisper-thin at just 0.4 months. Because houses are at a premium, rental rates have also risen, up by 9.4% since March, according to Apartment List.
Search out the Sun Belt?
The long-tail trend toward what is called the Sun Belt has picked up steam this year. Data released last month by RealPage (NASDAQ: RP) showed that cities in the South and Southwest have driven much of the demand for apartments. Dallas/Fort Worth, Atlanta, and Houston alone represented 17% of the nation’s apartment absorption in the third quarter. Atlanta in particular is seeing very high demand as people move into the city.
One way to capitalize on Sun Belt growth is to seek out residential real estate investment trusts (REITs) that specialize in those areas. Mid-America Apartment Communities (NYSE: MAA) has an ownership interest in over 100,000 apartments, many of which are located in Sun Belt cities.
Rally toward Raleigh?
The annual "Emerging Trends in Real Estate" report from the Urban Land Institute and PricewaterhouseCoopers named the Raleigh/Durham area as its top emerging market. It was also featured in our research for top rental markets at the start of 2020, partly because of the job opportunities in North Carolina's Research Triangle area. According to RentCafe, the average rent for an apartment in Raleigh is $1,238, up 6% from last year.
Like Boise, the Triangle region is seeing sales boom and prices rise. Triangle MLS reported that existing home sales were up by 27.4% year over year in September. The median price for a single-family existing home was $299,900, up 8.5% from last year. With just 1.3 months of inventory available on the market, homes to purchase are at a premium, and that should be good news for landlords looking to fill apartments.
The Millionacres bottom line
It's too soon to say if people will work remotely long term. The drops in San Francisco and New York rentals may very well be temporary. However, the interest in smaller cities and movement away from coastal markets is likely to extend far beyond this year.