If you own luxury rental properties and have been enjoying the hefty monthly cash flow that they can generate, you may need to prepare yourself for a dock in pay. According to the Wall Street Journal, you could find yourself cutting rents and offering concessions to either keep tenants in place or attract new renters. In fact, in New York City, landlords are already offering their moneyed renters as many as three months rent-free, while Los Angeles landlords are offering something potentially even more attractive: half a year’s worth of free parking.
The apartment sector overall has grown substantially in the past six years, in no small part due to the housing crash, which led to far fewer households owning their own homes than at any time in recent history. While many have returned to homeownership, a little more than a third of the population still opts to (or must) rent instead of owning. The result has been high demand for rental property at all levels, and apartment rents have risen more than 26 percent across the board since early 2010.
Although the demand for rental property is still high, most sectors of rental real estate are likely to slow in the coming year as rental rate increases have now far outpaced wage growth and inflation. In particular, luxury rental properties are likely to slow faster than other “tiers” in the sector because there is a smaller population demanding such properties and a number of developers and investors have sunk a great deal of money into constructing them, thereby creating something of a glut in the luxury market. Of the nearly 30,000 new apartments entering the rental “pipeline” in New York alone, about 85 percent of those apartments are considered luxury apartments.
A number of developers are trying to get ahead of the game by lowering rents up front on buildings not yet completed in order to lure tenants in. For example, a new project in the Nashville, Tennessee, area, with a fitness center, yoga and barre studio, and swimming pool has discounted rents by $150 a month on the standard unit in addition to offering up to two months’ free rent. The developer in question refers to this strategy not as a sign of disaster, however, but instead calls it a decision to “take a pause” while the sector works though excesses at the top end.
That certainly will be good news for renters entering the market this year and hoping to get some good deals on nice places to live, but it could even out as the developer suggested in the next few years. As banks slow their lending for luxury rental properties, it is likely that the market will stabilize again, although renters will still likely enjoy a stronger bargaining position than they have in recent years. With the pace of construction likely to slow by around 2018, the rental market as a whole will likely lose much of this temporary volatility in the next few years.
You can read more of Carole VanSickle Ellis’ coverage of this and other topics at Self-Directed Investor News.
About the Author
Carole VanSickle Ellis is the host of Real Estate Investing Today, a daily nine-minute investing podcast, and the editor of the Bryan Ellis Investing Letter. Contact her at editor@bryanellis.com or visit www.selfdirectedinvestor.org.
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