1

I live in a small city of about 25,000 people in the United States. Much of the existing housing stock in the urban core/downtown area is old (100 years or older) and in average condition.

Recently, the city approved plans by a few developers to build a series of large apartment complexes downtown, in the middle of the existing housing in that area. Within a year we are scheduled to have about 250 more apartments. The developers have let on that they'll be charging rates around $1000 per bedroom for the new complexes, which is at least 50 percent higher than the going rate in the existing housing stock.

I'm wondering what all of this -- more rental units, and higher rates to live in them -- will mean for rental rates overall in the city. Will rates go down because there will be more units in the city? Will they go up because the developers are setting higher prices, thereby setting a new normal for what people should expect to pay for an apartment in the area? Will they be unaffected because a different class of people will move into the new apartments, who will not be interested in the old ones?

I'm wondering because I currently own a few rental units in the older housing stock. I'm trying to decide if I should sell them with the expectation of rental rates going down, buy more units (overall, purchase prices in the city are quite low) or sit tight and see what happens.

4

All else being equal, introducing more housing (increasing the supply) should decrease the rental value of existing housing. However, it is unlikely that all else is equal. Some particular things to check:

  1. Is the demand for housing increasing? I.e. is the size of the city increasing?
  2. Is the supply for housing decreasing?
    • Are these 250 apartments replacing 300 existing apartments?
    • Are there apartments elsewhere in the city that are being torn down?
  3. Are these apartments targeted at people who may currently live outside the city (e.g. in houses) such that they don't really compete with existing rentals?

Will rates go down because there will be more units in the city?

This is possible, but I would point out that this is only 250 apartments holding what, 500 people? That's 2% of the population. And that ignores that some of the population of the metropolitan area is outside the city proper. I would not expect this to have that big an effect. Perhaps you skip a rent increase one year to compensate. The greater risk would be that this become expected.

It is uncommon although not unknown for developers to build into a declining market. The very fact that someone wants to build new housing may indicate that there is an expanding market overall. Or it may indicate that the developers are fools. We can't say definitively one way or the other in the abstract.

Will they go up because the developers are setting higher prices, thereby setting a new normal for what people should expect to pay for an apartment in the area?

This seems unlikely unless you also take steps to improve your apartments. Often older apartments get a sort of "good enough" treatment. You may repaint or replace things that are obviously broken, but you don't update. What this may be saying is that there is a market for luxury versions of your current apartments. You probably won't be able to demand luxury prices unless you improve your apartments.

You can see the kind of improvements I mean by watching practically any HGTV show. Replace laminate countertops with granite or quartz. Add a backsplash behind the countertop. Replace the cabinets with newer, prettier finishes. Replace drab older appliances with shiny new ones. Change an older closed floor plan into a more modern open floor plan. Replace functional but blah light fixtures with fancier new ones. Some people make a career out of converting houses that way. Perhaps your apartments could use the same treatment.

Will they be unaffected because a different class of people will move into the new apartments, who will not be interested in the old ones?

Maybe. This really depends on your local market.

Finding out

One way to determine this is to go around and ask your tenants. Do they want to pay more for a renovated apartment? Have they seen that these apartments are coming? Would they like you to renovate their apartment or move them into a different apartment after you renovate that?

If your tenants tell you that they are not interested in that kind of deal, then you probably have little cause for worry. Either the developers are targeting a different market or they have misgauged this market.

If your tenants are interested in this kind of deal, you may want to price out some renovations and consider how you can recoup the upfront cost. How much more would you charge in rent? Do you need longer lease terms?

Do you need to redo the outsides and hallways as well as the apartments themselves? Can you get all of the tenants of a building to agree? Or will you need to move some of them to other properties that you are not renovating?

You might try asking a local realtor about the market. Are properties being sold as soon as they list? Or sitting on the market forever? What do they think might be happening with these new apartments? Other possibilities include the local media or the local government.

If the local market is slow, you might try asking the developer if they are interested in any of your properties. If you choose to sell, that might save you some work. Ask how they expect to make money. Take what they say with a grain of salt, but you may learn something. Perhaps partner with them on a property. You provide the property while they do the renovations or demolition and replacement. The two of you split the profits in some way.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.