Rising Rents Are Giving Landlords More Leverage

Low supply and high demand rarely spell lower prices for consumers, and that imbalance continues to be on display in the US rental-housing market.

According to a recent survey of more than 500 rental property managers by Rent.com, 88% of respondents raised rents for tenants over the last 12 months.

And they’re not done – 68% of the property managers estimated rents would rise next year, with an average forecast of 8% growth. That’s up from the 6% forecasted increase in 2014.

The median asking rent in the US rose by 6.2% to $803 a month in the second quarter of this year, according to data from the US Census Bureau cited by CNBC.com.

Vacancy rates for rental housing nationally dropped to a 20-year low of 6.8% in the second quarter, down from 7.5% in the year-earlier period, census data show.

At the same time, demand is increasing – 45% of managers in Rent.com’s survey said they saw more Millennials numbering their prospective tenant rolls, and 54% saw increased numbers of former homeowners looking to rent. At the same time, more renters appeared to be renewing their leases rather than moving, the survey found.

Rents and occupancies are hovering at historic highs as supply isn’t keeping up with demand. While apartment construction has seen strong growth over the past three years, construction of multifamily homes such as apartment buildings fell to next to nothing amid the housing bust, so new units are meeting with pent-up demand.

That formula has appeared to induce investors to bid up the stocks of publicly traded rental property operators. Over the past 12 months, the Renter Nation motif has risen 21.0%. In that same time, the S&P 500 has risen 9.9%.

In the past month, the motif has increased 10.0%; the S&P 500 is up 3.4%.

The rising prospects for landlords also had a hand in a recent merger between two of the industry’s biggest players. Late last month, Starwood Waypoint Residential Trust SWAY said it would acquire privately held Colony American Homes in a deal worth $1.5 billion.

As the Wall Street Journal noted, the two companies own a combined total of more than 30,000 homes valued at nearly $8 billion – both firms were part of the rush by big investors to buy foreclosed homes in bulk, often sight unseen and at steep discounts, after the housing market collapsed in 2008.

The investment purchases were concentrated in some of the hardest-hit areas, including southern Florida, Phoenix, Atlanta and California, with an aim to gain enough size in each market to make management of the properties more efficient, the Journal said.

Other major buyers of single-family rental homes include Blackstone Group LP BX, which has spent nearly $10 billion to acquire and spruce up about 50,000 foreclosed homes now rented through its Invitation Homes unit, according to the Journal.

The proposed merger of Starwood Waypoint and Colony is a clear bet that the percentage of Americans who own homes will remain unusually low. While the foreclosure crisis has receded, toughened lending standards have pushed and kept out millions of Americans from the home-buying market.

The US homeownership rate is at its lowest level in nearly 50 years, falling to 63.5% in the second quarter, according to the Commerce Department.

In contrast, single-family rentals now add up to 13% of overall housing stock, up from 9% in 2005, according to a report by Moody’s Analytics cited by the Journal.

Meanwhile, even though the Federal Reserve backed off from raising short-term interest rates from near zero, an eventual rise in interest rates would increase borrowing costs and make it even more difficult for some renters to buy homes.

That is little solace for potential home owners, but it could sustain the rally in publicly traded rental operator stocks.