Since the housing market crash and the Great Recession, most of the new households formed in the United States were renter households. Check out how vacancy rates have changed over time.
Homeownership rates in the United States have hit historic lows not seen in decades. According to the U.S. Census Bureau, the homeowner vacancy rate in 2019 was 1.3% and the rental vacancy rate at approximately 6.8%. The housing market continues to see rapid changes and steep price hikes. Affordability is an issue for both renters and homeowners. Even with the construction boom of new multifamily properties, demand continues to rise for rental apartments and single-family homes.
In the past five years, the U.S. rental vacancy rate has steadily declined. Vacancy rates describe the percentage of unoccupied dwellings. In a rental property, this is the opposite of the occupancy rate. Within the last five years, vacancy rates in both urban, suburban, and rural areas have reached the lowest rates seen since the early 1990s.
The population centers of the United States have started to shift in the last 20-30 years, as more residents move to the Northeast and Western regions of the country. These areas have always had the highest number of renter households. Demand for more rental housing has exploded in these areas where the population is growing the fastest.
Improved employment opportunities elsewhere and other changes in the economy have seen more people moving out of the Midwest area of the country, headed to the coasts. The Midwest and Southern regions of the United States have historically had higher rates of homeownership.
Increasingly, some larger metro areas are enjoying a “winner takes all” advantage when it comes to rental properties. They have an abundant supply of renters in the high-income bracket with more disposable income who are willing to compete for the best apartments and rentals. Many renters in these cities are discretionary, meaning they have the choice between renting or owning, and they prefer to rent, often to be close to a city center or a job. These renters drive demand for high-end luxury apartments.
Where the vacancy rates for rental properties are low, the costs of renting tends to rise. This creates the perfect storm for apartment and home seekers. In some cities, it’s impossible to find an apartment, much less afford one. Competition is steep, especially in the Western and Northeastern regions of the United States. For example, affordable apartments are often awarded only by lottery in New York City.
When it comes to the average median rent rates, in 2018 New York had the most expensive average rentals zip codes anywhere in the nation, followed by Los Angeles, San Francisco, Boston, and, well, New York.
The most expensive neighborhoods by zip code also were located in these metropolitan regions, and while the renters in these neighborhoods are predominantly discretionary renters, the difference is eye-popping between the Hamptons in New York, and Wichita, Kansas.
The most expensive states to rent in are Hawaii, California, Massachusetts, District of Columbia, New York, and New Jersey.
The demand is not just from those who lost or sold their homes in the turmoil after the housing market crash. One of the most significant segments of the U.S. population is reaching the age when households are typically formed. Millennials are increasingly choosing to rent instead of buying a home. It’s not only harder than ever to buy a home, but the events that usually coincide with purchasing a home, such as marriage and the birth of children are coming much later in life for this generation. Instead, they are choosing to rent. Millennials pay far more in rent than other generations did at the same age.
Understanding Rental Vacancy Rates
Vacancy rates can help landlords, property owners, and investors understand and analyze the viability of properties and have a point of comparison to others in the area and region. Several categories of housing units fall under the vacant rental housing category utilized by the U.S. Census Bureau. These include vacant and for rent, rented but not yet occupied, seasonal or short-term use, and other, which includes rental properties that are neglected or abandoned, and therefore vacant.
Understanding a vacancy rate can help calculate the property’s potential to generate rental income and cash flow. Calculating a property’s vacancy rate can be done by multiplying the number of unoccupied units in a building, rental portfolio, or property by 100, and then dividing by the total number of units. The median rental vacancy rate in the United States has hovered around 7%, and in dense urban areas, 2% to 4% is an acceptable rental vacancy rate. Rental vacancy rates will also differ based on the type. For example, a short-term or vacation rental property will have a higher vacancy rate than a residential rental property because of seasonal demand. If you are utilizing a site like AirBnB there are calculators to help you determine what your occupancy and vacancy rates are and plan your rates and management of the property accordingly.
Multifamily properties and single-family residential rental properties should be much lower than a short-term residential property, with an average vacancy rate between 4% and 6%.
Landlords should compare the vacancy rate of their properties to the total number of other properties in their area. High vacancy rates in the market may indicate the area is oversaturated or not as attractive to potential tenants. Landlords and property management companies who are experiencing high vacancy rates in a market where the overall rental vacancy rates are low should determine if their rental prices and amenities are competitive enough and properties are being maintained appropriately.
Finding a happy medium between the for-sale and for-rent vacancy rates to meet the needs of prospective buyers and tenants is difficult. From the perspective of a property owner, the longer their properties remain vacant, the tougher it is to keep structures maintained and offer competitive rates to other tenants. Multi-family units that remain empty for too long may attract crime in the form of vandals, squatters, and metal strippers. In Philadelphia, vacant properties have resulted in $3.6 billion in reduced household wealth, and that the effect of one vacant property on the block could reduce the value of nearby properties by 20% or more.
Owner-occupied homes tend to see a much lower vacancy rate than rental units because homeowners usually stay put in a home longer than renters. Rental vacancy rates tend to be higher in unstable housing markets or where an area is still under development and construction. In weak housing markets, vacancy rates can approach extremely high rates, also known as hyper-vacancy.
While the general perception of property vacancies may be a negative one, vacancy on some level is necessary for a healthy market and economy. In the United States, people move frequently. Circumstances, changes in employment, family dynamics, marriages, divorces, and other life events mean moving a household. It may be across town or to the other side of the country. There’s a reason companies like U-Haul and Penske do booming business renting trucks for moving households.
Healthy vacancy rates that work for both potential tenants and property owners remain a delicate balance. In markets where there are jobs, but vacancy rates are meager, and housing is scarce, individuals and the economy struggles. Employers may find it hard to recruit and keep workers in markets where it’s difficult for their employees to find a place to live or housing is too expensive. Many businesses in service-oriented industries experience extremely high turnover rates. They may find it hard to pay employees a high enough wage where they can afford to live close enough to work.
The Affordability Crisis Affects Everyone
There is not enough new construction of rental properties nationwide to keep up with the demand. This affects both low, mid, and high-level income earners. Low-income housing is the most needed, and the private market falls short in providing even half of what’s needed. There are only 37 homes for every 100 low-income renters. Most of the new construction of apartments or multi-family units are intended for renters with higher income, with developers planning and executing one block of luxury apartments after another in big metro areas.
Older housing and apartments aren’t necessarily affordable either. The cost of maintaining rental properties has risen, and most landlords and management companies will not rent properties out at rates that don’t cover operating expenses.
It’s a tough time for tenants. While the economy of the United States has continued to expand, income and wage levels have not kept pace with the higher-than-ever prices of renting or purchasing a home. Renters in most major cities are severely housing cost-burdened. When comparing the amount of money an individual or household pays towards rent versus their income, 30% of income is generally considered a sustainable number. The 30% “rule” came about when the United States National Housing Act of 1937 established what constituted eligibility for public housing, and was revised in 1981 to 30%. The median rent burden for millennials, the most significant renter segment in most regions, is 45%.
Households who spend more than 50% of their income on housing are considered to be severely cost-burdened. These households are often at a higher risk of falling behind on rent and being evicted or at the very least, skimping in other critical areas to pay rent. Most renters pay for their contracted rental rate, and additional utilities such as electricity, gas, water, and other fees levied by their landlord or property management company.
A full-time worker earning the average median wage and working 40 hours a week can afford a two-bedroom rental home in only 20% of U.S. counties. Over 50% of renters pay more than a third of their income on their housing. Zillow estimates that only 42% of its rental listings are attainable for households making the median U.S. income. That number dropped to 16% for black households, and 27% for Hispanic households. Economic mobility is difficult enough for a renter household, and the steep rents around the country can grind it to a halt entirely for some.
While increasing costs of living are a part of life in America today, the rental crisis affects property owners and landlords as well. The cost of maintaining properties is high. Vacant units do not produce income. Institutional investment corporations enjoyed government subsidies during the Great Recession, enabling them to amass billions of dollars in rental real estate properties. These rental property owners may not feel the squeeze as much but they have unprecedented influence over their markets. Their buying and rental strategies price out many prospective homebuyers but also affect the segment of the rental market with smaller rental property portfolios.
Private investors, landlords, and property owners are directly affected by the instability created when their tenants become excessively housing cost-burdened. These households often move frequently, whether they are evicted or forced to move due to rent increases or other changed economic circumstances. High tenant turnover and the cost to evict tenants can become even more expensive for a landlord than high vacancy rates.
Negative Consequences of Excessive Rental Vacancy
Much of the focus of the rental housing crisis is on the booming metropolitan cities where renters are sharing bedrooms, and multiple families occupy two-bedroom apartments. On the other end of the spectrum, some regions in the United States are seeing vacancy rates are so high it has become a crisis of its own.
In areas where the job market is limited, and the workforce is primarily in the low-income bracket, rental vacancy rates can be higher. Less common is a situation where the real estate market is oversaturated with new construction.
High vacancy rates are more common in “legacy cities,” which are usually older cities with shuttered manufacturing or industrial businesses. In these areas, vacancy rates can climb to levels that affect entire neighborhoods. These areas have typically suffered considerable population loss, poverty, and sustained lack of civic engagement.
Housing vacancy can cause tremendous problems in regions already ravaged by economic and social transformation. After 2008, vacancy rates exploded. In 2005, there were 9.5 million homes considered vacant, and in 2010, the number had climbed to 12 million.
The rise of rental vacancy didn’t only occur in “legacy” cities like Detroit, with entire swaths of neighborhoods sitting empty and decaying. Homes became empty at alarming rates in rural and small towns too. Whether it was an older occupant who had lived in one home most of their adult life or a relatively new homeowner who found themselves underwater with the mortgage and unable to stay in their home, Americans were moving out at rates not seen before. The surging rents that came in the wake of the housing crisis resulted in high rates of evictions, and in some neighborhoods, tenants never returned to rental properties.
Millions of properties in these areas sit empty. In extremely rural areas, a property’s vacancy doesn’t usually affect much. In both small towns or urban neighborhoods, vacant, poorly maintained, or abandoned properties create huge problems. Property owners who are unable to afford to maintain them without tenants may become foreclosed on themselves or simply walk away. These properties can rapidly become distressed properties. Distressed properties become a blight and reduce local property tax revenues, attract crime, and diminish property values for everyone who may be living nearby. In old cities like Detroit, Baltimore, and Cleveland, there are more vacant properties than occupied ones, and this has caused far-reaching, devastating effects on neighborhoods.
Vacant properties can be used to revitalize communities and help ease the demand. Developers are only beginning to tap into the potential of repurposing older buildings and homes. In some areas such as big cities with high property values and demand for housing, this happens anyway. The market forces the use of any vacancy that exists. In more economically depressed areas, where vacancy has reached or surpassed hyper-vacancy rates, more work and collaboration is needed between the local governments, developers, and other entities to help change the course of these neighborhoods for the better.
The nostalgia that has begun to inform a lot of popular culture and trends beyond “hipster culture” has made old buildings cool again. In both big cities and smaller towns, rentals in revitalized older properties are sought after. This trend has contributed significantly to revitalization, new housing units, and preservation of old structures for non-traditional purposes. There are some restraints and considerations when commercial spaces are repurposed, due to older building materials like asbestos and lead paint being dangerous. However, when done right, and with respect shown to the existing community, the revitalization of older buildings can yield distinctive, beautiful results that are attractive to potential tenants. Architecturally unique structures can be enjoyed again as excellent rental properties. This happens all the time in metropolitan areas. It’s also possible even in remote areas, and it can be done without eliminating or pricing out existing residents, a process also known as gentrification.
An example of rural revitalization is an old mill in Dover-Foxcroft, Maine. My ancestors worked in this mill. While our family no longer lives in the area because there’s not enough economic opportunity for us there, we visit occasionally. Rental housing is extremely scarce in this town. Most of the properties are owned by either vacationers who are only there in the summer or locals who will not move anytime soon. It is in one of the poorest counties in the state of Maine. In the small town center, there’s a large textile mill sitting next to the river. The first time we walked through the mill, we were saddened by how far downhill the property had gone. Water damage had seeped into even the lower floors of the mill, and decay was beginning to set in. The next time we went to visit, we were pleased to discover that a developer was working closely with the Maine Preservation Society to transform the Mill into a vibrant mixed-use property. The plan was for retail, hotel, and office space. The larger portion of the upper floors would be apartments. This project represents an outstanding example of private developers working with public authorities to revitalize a sad, run-down part of the town and create rental housing in the process. Today the Mill contributes once again to the economy of the area and provides much-needed rental property to the market. Other properties in the area have become revitalized, and the area is again thriving.