An Apartment Bubble? Seriously?

Recently I’ve heard murmuring from a couple different quarters that there could be a bubble forming in the rental housing sector. It has been suggested that in some markets, development talent and money started to flow into multi-family projects about a year after the economy crashed because it needed somewhere to go. Consequently, lots of new apartments were constructed (or are in the process of being entitled, designed, and constructed), leading to too much supply, which was having a flattening effect on rent growth. Furthermore, fears were expressed that since renting, in some markets, was now more expensive than buying, pressure was building for a flight back into ownership of the 3 percent, give-or-take, of Americans who moved from owning to renting in the housing crisis because they had no other options.

Huh. I suppose this could be happening, or about to happen. I’ve even heard a bit of testimony from a colleague in the Midwest that some evidence of this has surfaced. I don’t get much sense though, from scanning the press, that it is at all widespread.

So it got me to thinking about a few things.

First, whenever there’s a discussion of “the housing market,” it is invariably concerning single-family dwellings. Since nearly two thirds of everybody lives in them, this makes sense. A multifamily community, on the other hand, is a different animal. Individual residents don’t sink their life savings into a down payment on an apartment; nor do they reap the economic benefits of expanding equity in those glorious times when SFDs are actually increasing in value. (Remember that?) Renters are also highly mobile, and leaving a rental apartment may be sad, but it is rarely the devastating event that losing one’s home can be.


“Bubble” suggests over-eager, and perhaps under-educated persons buying into something when its price has been driven to the point where there’s no escalation room left. One day the bluff is called, a selling frenzy ensues, and losses, some massive, are incurred, especially for those who got in right near the end.

Could it be possible that too many apartments are being planned or built right now? Not from what I read. First, it is possible that the paradigm has been reset, and many among the 3 percent mentioned above will simply not return to housing ownership. Beyond that, simple birth rate and “un-coupling” are expected to continue to keep demand percolating at a decent clip for a while yet, and the pause in apartment construction over the last few years created a deficit that will be some time in the filling.

Locally (LA), I keep wondering what will happen if the right nexus of influences occurs that leads renters to start moving back into for-sale housing. I’m thinking particularly of a decent number of condominium projects that were constructed and never sold, but rather rented. Say it began to be evident in the marketplace that renters were starting to evacuate in droves. How many moves from a condo-rented-as-an-apartment would it take for a building owner to start scratching her head and thinking, “hmmmm . . . is it time to put these puppies back on the market?”

I expect it would take a lot, and I don’t see that happening anytime soon. On the other hand, one might argue that the gestation period for a new apartment building, if one started the entitlement process today, is a minimum of 3, and possibly more like 5 years. How many renters will be getting the itch (and down payment, and loan approval) to bail in 2016? I guess I’m arguing that if the for-sale condominium market really ratchets up, then the other 80 percent of the residents of a building that’s being un-rented will need a place to go, won’t they?

Too bad my crystal ball is still broken.