As Noah Smith observed, economists invariably encounter monumental resistance to the proposition that increasing housing supply will do anything meaningful to address the problem of rising rents–especially because new units are so costly. One of the frustrations that we (and increasingly cost-burdened) renters share is the “temporal mismatch” between supply and demand. Demand can change quickly, while supply responds only slowly, thanks to the long time it takes to detect a market need, plan for, permit, finance and then finally build new apartments. Rents go up quickly, and economists can only counsel patience while this process is unfolding.
But it’s increasingly apparent that housing supply is now responding. Several cities are recording impressive increases in the number of new apartments permitted and under construction. Take Seattle, which saw rents increase nearly 10 percent in 2015. Like the rest of the country, the city saw a fall off in new construction after 2007 with the advent of the Great Recession. But since then, developers and investors have been pouring money into the local housing market. Nearly 10,000 new apartments are expected to be completed in just the next year. As the Seattle Times highlighted, more apartments will open this decade in Seattle than in the previous half century.
Even though these apartments haven’t been completed yet, the growing supply, and the prospect of more units coming on line is already having an effect on prices. According to the Seattle Times, one local market analyst is saying apartment rents have reached a turning point; rents in some of that city’s hottest neighborhoods have declined between 3 and 4 percent in the past year.
Just about three hours south, down Interstate 5, Portland’s housing market has seen a similar cycle, with events lagging about six to a year or more behind Seattle. Just a year ago, Portland had the highest rent increases in the nation–12.4 percent year-over-year in October 2015–according to real estate firm Axiometrics. But since then builders have been moving aggressively to add more apartments. The city has permitted between 3,000 and 4,000 apartments in each of the last two years. According to local market analysts Barry and Associates, 7,000 units are currently under construction and and additional 15,000 are in the planning stages. In Portland, as in other cities, supply is responding, in a big way, to past rent increases.
To be sure, the supply response hasn’t actually produced declines in rent levels–yet. But as more and more new units come on line, and their owners seek tenants, the balance of power in the rental marketplace will shift from sellers to buyers.
The recent sharp growth in supply comes, ironically, just as the City of Portland has enacted one of the nation’s most demanding inclusionary zoning requirements. Developers building 20 or more apartments will be required to set aside 20 percent of their units for households earning no more than 80 percent of the region’s median household income. (Indeed, a big part of the reason for the recent surge of applications to build new apartments has been developers seeking to obtain building permission prior to the February 1, 2017 effective date of the new regulations). Almost exactly the same thing happened in San Francisco, as developers scrambled to beat the deadline for that city’s more stringent inclusionary zoning requirements.
There’s a growing body of evidence that as more housing gets built, rent inflation moderates, and rents even decline. Nationally, Axiometrics sees a slow down in rental growth, with actual declines in some markets. In Houston, New York and the San Francisco Bay, growing inventories have produced “negative rent growth.” Last month the Chicago Tribune reported that while rents were up about 2.3 percent citywide, they were down about 0.3 percent inside “The Loop.” The New York Times even floated the notion that 2017 will be “The Year of the Renter” as growing supply takes the edge of rent increases in New York.
For the moment, then, the good news is that in these coastal cities, where rents have been rising at alarming rates, that the forces of supply and demand are operating. As more apartments are completed–even at the high end of the market–the added supply is dampening the rate of rent increases. The key question going forward is whether the demanding inclusionary requirements enacted in places like Portland and San Francisco–and which are still pending in Seattle–will prompt developers to pull back from the current frenzied pace of building.