SALT LAKE CITY — For the eighth straight year, vacancy rates for rental apartments in the Salt Lake metro area have declined — down to the lowest rates ever.
New research from Cushman & Wakefield indicates that the apartment market is currently at historic levels with mid-year figures showing the vacancy rate of just 2.6 percent — the lowest ever reported, according to Kip Paul, executive director of investment sales at Cushman & Wakefield's Salt Lake office.
Current data in the "Apartment Market Report for the Greater Salt Lake Area" indicates apartment communities in the area are considered fully occupied, he added.
“This low vacancy is fueling a record-breaking level of construction of new apartment buildings," Paul said. "This begs the question of whether the market is over-building. The data shows that even with previously unmatched levels of development, the demand is such that there is no sign of oversupply in the foreseeable future and property investment, particularly in midsize communities, is particularly attractive to buyers.”
For the first time in recent history, he said, midsize apartment communities — 100 units to 250 units — are driving market conditions in Salt Lake County. That specific market segment has the highest rental prices per square foot and the lowest vacancies with an average rate per square foot of $1.25 and a vacancy rate of 2.2 percent, he noted.
This year marks the sixth consecutive year with an overall vacancy rate below 4 percent, the report states. While the optimal vacancy rate is considered to be around 5 percent, according to Paul, the exceptionally low rates in the Salt Lake Valley are prompting increasing project development from investors, who view the local market as one of significant opportunity.
Cushman & Wakefield | Aaron Thorup, Cushman & Wakefield
"In my experience, this (market cycle) is quite unique because of the extended duration of this (high) phase of the cycle," said Dan Lofgren, president and CEO of Cowboy Properties. The company has developed 18 apartment communities in northern Utah from Ogden to Provo over the past several decades.
He said a full cycle can take between seven and 10 years to go from a high demand peak down to a low point, then return to the next cyclical peak. That has not been the case in this current cycle, he noted.
"We have been at this high part of the cycle for six or seven years," he said. "Strong demand and absorption that is keeping up with supply. As a result, rental rates are increasing."
Absorption is defined as the market's ability to lease a rental unit in a specific real estate market, he explained. Cowboy Properties has developed several new multifamily rental communities in the past few years, including a new property near downtown Salt Lake City, Lofgren said.
Salt Lake County has 35 apartment communities with 6,546 individual units under construction, according to the report. Paul said bringing on so much high-quality new inventory will push vacancy rates higher, but with low vacancy rates and strong forecasted economic growth, overall market conditions should remain favorable for developers and more expensive for renters well into mid-year 2018.
While vacancy rates will likely remain low, the cost of living in a newly constructed apartment is the metro area will continue to climb. Rents have increased 6.5 percent since 2016 after years of 3 percent to 5 percent growth in prior years, Paul said.
In the short term, the rising cost of apartment rents may squeeze affordability for many average individuals and families looking for places to live, which is a concern for Lofgren, who said he worries "every day" about the impact of rising rents on local families.
"It's a big issue," he said. "There are a lot of households that are 'rent burdened' — meaning they are spending an inordinate amount of their household income on rent. And (some) are just completely unable to afford housing."
The issue of affordable housing is becoming a major challenge along the Wasatch Front. He noted there is economic data suggesting the metro area needs about 7,500 units of "income restricted" affordable rental units to meet current and ongoing demand.
Cushman & Wakefield | Aaron Thorup, Cushman & Wakefield
"By income restricted I mean they are set aside to be affordable to households at or below 60 percent of area median income or 40 percent of area median income," Lofgren said. "But even for those households that have a little greater economic freedom, a rising share of their household income is going to rent."
However, despite the trend toward rising rents, the Salt Lake area is still among the most affordable areas in the western region, Paul noted.
"As much as our rents have increased here in the past seven or eight years, we are still relatively very affordable when you compare us to surrounding cities (like San Francisco, Denver or Seattle)," he said.
If current population trends continue over the next few years, Paul said there might be a possible change in the kind of rental development that could come to the area.
"The next step that (could) occur is a steel-structured building," he said. "They'll go over the (typical) five-level (wood) frame construction, and you could very well see a 15-story apartment complex built here soon."
He added that some developers have already begun discussing the potential for a mid-rise apartment building in the not-so-distant future.
For those people who are not able to afford the higher rents that come with a new construction rental unit, there are still some options available in existing properties that may have fewer high-end amenities but offer many suitable features for the average "mid-market" apartment seeker.
"You'll also start to see developers who perhaps in the past have been building upper-end projects start building more "workforce" projects," he said. Those developments would be built with tax-exempt bonds as a component of financing to allow the developer to reduce building costs and then include a percentage of units that are affordable to mid- or- low-income residents as part of the finance agreement.
For the coming year, he said favorable market conditions are expected to continue with demand for quality rental units remaining as strong as ever.