The Star Tribune recently reported on the thriving multifamily sector. You likely know that apartment vacancy in the Twin Cities is low (2.3% in Q3 of 2011) and rents are rising.
However, the article noted that even though demand is booming, rents are only slowly rising. What role does the shadow rental market (condos, duplexes, houses, town homes) have in slowing apartment rent increases?
Is it that in bad times the shadow market eats into apartment occupancy and in good times prevents a more rapid rise in apartment rents? Let's dig into the data of Twin Cities Rental Revue: In Q3 and Q4 of 2011 the Shadow Market made up 62% and 65% of openings listed in the Twin Cities.
What does this mean? Though openings are slim in apartments, renters still have plenty of other alternatives in the shadow market. These alternatives may act as a weight on rent increases in apartments, preventing them from rising as fast or as much, even in a strong rental market.
Twin Cities apartment rent increases from Q2 - Q4 of 2011 (Median Rents)
0 BR - No Change ($580 to $580)
1 BR - Up 4% ($690 to $720)
2 BR - Up 4% ($850 to $885)
3 BR - Up 4% ($1,142 to $1,190)
4+ BR - Up 8% ($1,195 to $1,297)
Twin Cities shadow market rent increases/decreases from Q2 - Q4 of 2011 (Median Rents)
0 BR - Up 16% ($585 to $695)
1 BR - Up 2% ($795 to $813)
2 BR - Up 2% ($1,025 to $1,050)
3 BR - Down .7% ($1,295 to $1,285)
4+ BR - Up 4% ($1,525 to $1,590)
The primary floor plans where the shadow market competes with the apartment market are 1, 2, & 3 bedrooms. It is interesting to note that shadow market rent increases for 1 & 2 bedrooms were smaller than the apartment market (2% compared to 4%) and there was a slight rent decrease in shadow market 3 bedrooms.
What do you think? Is the shadow market contributing to slower rent increases in the apartment market?