By: James Wood
The share of renter households is increasing in Utah creating the “tightest” rental market I’ve seen in my forty years of experience with the local housing market Ten years ago twenty six percent of all households in Utah were renters. By 2014 that share had grown to twenty-nine percent. This three percent swing in favor of rental housing produced an additional 27,000 renter households statewide in 2014, pushing the total of renter households to 261,000.
Initially much of this increased demand was met by rented single family homes. Single family homes now represent forty-one percent of all rental units statewide, up from 31% in 2000. Rented homes are now scattered throughout most suburban neighborhoods providing low density rental housing for renters who can pay $1,500 to $2,000 a month for rent.
But this source of supply—rented homes—is no longer expanding and may even be shrinking as higher home prices provide an economic incentive for rented homes to be sold and revert to owner occupied units. Consequently the growing demand for rental housing is now met primarily by new apartment construction. The market has responded with very high rates of new construction activity. Apartment construction hit its highest level in thirty years with 6,000 units receiving building permits in 2014 (see Figure 1 above). One third of all residential building permits issued in 2014 were for apartments. The only years with greater levels of apartment construction are 1984 and 1985. The record level of construction in these two years was not due to high demand for rental housing, but rather impending changes in federal tax code regarding depreciation allowance for investment property “put in service” after 1986.
The extremely “tight” rental market conditions in Utah cities and counties have encouraged the spike in new apartment construction. Vacancy rates in some cities are at record lows and rental rates are rising. The July apartment vacancy survey for Salt Lake County by Commerce Real Estate Solutions reported a vacancy rate of 2.7 percent, the lowest rate in the fourteen year history of the survey. All rental markets along the Wasatch Front have vacancy rates below five percent despite the increase in supply of new units. In 2014 rental rates increased from five to eight percent across the Wasatch Front rental markets. The weighted average rental rate for all types of units (studio to three bedroom units) in the Wasatch Front Counties is $854. Rents in recently completed projects are much higher. A two bedroom apartment in a new Class A project in Salt Lake City rents for at least $1,200 about $1.06 a square foot.
Over the past two years the “hot” apartment market has been the defining feature of the residential construction sector. And with nearly nine thousand units under construction in Wasatch Front counties and another six thousand units in the approval process, the apartment boom will extend well into 2017 as the renter’s share of all households moves above thirty percent.
James Wood is the Ivory-Boyer Senior Fellow at The Policy Institute, specializing in several research areas including housing, construction, real estate, and economic impact development.