Multifamily Midwest

Falling rents? That doesn't mean apartment demand is slowing

Falling rents doesn't mean a fall in demand for apartments,ph01

Sam Radbill, senior communications manager at ABODO Apartments, said that a recent dip in average apartment rents shouldn’t provide a scare to investors or developers. The apartment market has been so hot for so long, a small decline in apartment rents shouldn’t be unexpected.

And the decline that ABODO is charting? It certainly qualifies as modest.

“In many of the nation’s hottest real estate markets, construction booms have brought on a recent reduction in average monthly rent,” Radbil said. “But rents haven’t declined by a ton, obviously. There are still not very many rent bargains out there for tenants. Rents had risen so high, this is just a small bit of relief for renters.”

Radbil said that the market today is experiencing a classic case of supply meeting demand.

Last year, new apartment construction reached a 30-year high, Radbil said. Much of that growth came in major Midwest cities like Chicago, Minneapolis and Milwaukee. With so much new supply, it’s not surprising that multifamily rents dipped at least a bit across the region.

Is this a long-term trend? Radbil said that no one can predict that. But he did say that from ABODO’s research, it looks like apartment rents might have leveled out, at least for the rest of 2018.

“Developers are clearly aware of the amount of building and new construction in this sector that has taken place and is scheduled to take place in the next few years,” Radbil said. “Before anything gets underway, development teams will know about the demand. That might stop some from building at quite the same pace. But if they think they can fill those units, they will continue to build. And in many markets, the supply is still catching up to demand. In others, there will need to be a slowdown in new development while supply and demand equal out.”

Rent trends in three key Midwest markets

ABODO studies rental markets across the country, and across the Midwest. Some of these Midwest markets are bucking the trend of rental rate dips.

 

For instance, in Milwaukee, average apartment rents rose 2.29 percent for one-bedroom apartments from April to May. The average rent for a one-bedroom unit in the Milwaukee market stood at $849 in May.

 

Two-bedroom rents increased, too, though only slighting, jumping 0.81 percent from April to May. The average rent for a two-bedroom apartment in Milwaukee was $992 in May.

 

In Minneapolis, though, rent prices fell. ABODO reported that in May, the average rent for a one-bedroom apartment in the Minneapolis market was $1,310, down 4.66 percent from April.

 

The average rent for a two-bedroom apartment here was $1,827, down 4.14 percent from April.

 

Average rents fell in Chicago, too, though they remain high compared to the rest of the Midwest. ABODO reported that one-bedroom rents in the Chicago market fell 3.6 percent from April to May, hitting $1,580.

 

The average two-bedroom rent in the city was $1,920 in May. That’s down 2.98 percent from April.

 

Demand remains high, though, in much of the Midwest

 

Even as rents trend down in several Midwest markets, the demand for modern apartment space is still high in cities from St. Louis and Des Moines to Iowa, Indianapolis and Topeka.

 

That’s because in many of these cities, apartment construction was sluggish during the housing boom of the early to mid-2000s. Now that more people are renting, the number of units available is lagging.

 

Matt Bukhshtaber, executive vice president with the St. Louis office of CBRE, said that demand for multifamily developments is especially high in his market.

 

“I feel like there is a lot more equity out there looking for multifamily,” Bukhshtaber said. “Year over year, people have stayed bullish on multifamily given it’s such a recession-proof asset class. People need a place to live, whether they are renting by choice or renting by necessity.”

 

The good news for developers is that both these types of renters are on the increase.

 

Those renting by choice are looking mostly for Class-A apartments, often in the center of urban areas. Those renting by necessity are moving to apartments because they might struggle to qualify for a mortgage loan today.

 

“All the fundamentals of multifamily are still moving in the right direction,” Bukhshtaber said.

 

Bukhshtaber said that demand in the St. Louis market is high for both apartments in the center of the city and those in the suburbs. The movement toward urban areas remains strong, Bukhshtaber said, with people – often Millennials – still searching for a walkable live/work/play environment.

 

At the same time, other groups of renters are targeting suburban developments. Some developers are even focusing on a hybrid of urban and suburban apartment project, multifamily units built in the suburbs but built within easy walks to public transportation, theaters, restaurants and retailers.

 

“You might have a development in the suburbs that has retail and apartments, a lifestyle, walkability-type center to create an urban feel,” Bukhshtaber said. “There is a lot of that going on today.”

 

Bukhshtaber points to developments such as the Streets of St. Charles in the St. Louis suburb of St. Charles, Missouri. That development includes retail, office, a hotel, restaurants and apartments.

 

The Meadows in the suburb of Lake Saint Louis is another example of this urban-suburban trend. This development already has retail and restaurants. Plans now call for an apartment development to be built next to the development. Other plans include a new hotel.

 

But wherever new apartment developments rise, they must include a base level of amenities, Bukhshtaber said. If they don’t, they’ll struggle to attract renters.

 

High-end fitness centers are common at new apartment developments throughout the Midwest. Other properties are offering virtual fitness classes on demand, where renters can select a workout by tapping a touch screen.

 

Lavish outdoor spaces, for parties, barbecues and other gatherings, are popular, too, as are pet stations and dog-walk areas. Many Midwest high-end apartment developments offer charging stations for electric cars. Bukhshtaber has even seen developments that include TVs built into mirrors, so renters can watch TV as they get ready in the morning.

 

Ceiling heights and concierge services matter, too. Bukhshtaber says that he sees more apartment units offering 10-foot-high ceilings instead of 9-foot ones. Others are offering expanded concierge services.

 

“It’s all about the extra touches,” Bukhshtaber said.