Is Income Growth a Reliable Predictor of Apartment Rent Growth?
Conventional wisdom says that rent growth is contingent upon income and job growth. Is that always true, and if so, to what degree?
MPF Research examined the relationship between apartment rent, income and employment levels in each of the top 50 U.S. metros over the past seven years. The results showed that while there appears to be a general relationship between the three, it’s not nearly as consistent as you might think.
The key finding: Income growth appears correlated with rent growth primarily in markets on the extremes. The relationship, however, is notably weaker in most metros – suggesting that income growth is often an unreliable predictor of rent growth.
The chart plots the nation’s largest 50 metros according to their proportional levels of rent and income growth between 3Q 2007 and 3Q 2014. The green and red bubbles measure each metro’s proportional employment change over the same time period. Green bubbles indicate positive employment change, while red indicates negative, according to Bureau of Labor Statistics data. Rent change is measured on a same-store basis, using MPF Research data. Income change is based on median household incomes from Moody’s Analytics.
The chart shows that income-to-rent relationships are often linear but fatten considerably in the middle, where most metros sit. In the middle of the chart, note the large number of markets that saw rent growth between 10% and 15%. Among those metros, concurrent income growth varied from -2% to +10%. So, the “better-rent-growth-comes-with-better-income-growth” theory holds true at the extremes, but not so much in between.
There were some surprisingly counter-intuitive results in a number of key markets: New York ranked among the nation’s best for income gains and worst for apartment rent growth. Miami ranked favorably for rent growth despite essentially no improvement in incomes. Raleigh/Durham fell in the middle-of-the-pack for rent growth despite ranking among the nation’s elite for income gains.
In other words, the relationship between rent and income simply isn’t consistent enough to bank on moving forward. This is a key reason why MPF Research abandoned one-size-fits-all forecast models used for all metros, adopting more advanced forecasting methods that look at unique drivers in each individual metro.
Before going further, it’s important to mention a few disclaimers. This study is not intended to measure apartment affordability – a hot topic in the industry these days. The comparison from 2007 to 2014 was selected to compare the previous up-cycle to today. MPF Research recently posted a separate study showing that, adjusted for inflation, apartment rents have merely kept pace with inflation between 2002 and 2014 – a more meaningful period to compare – while incomes have lagged. Home prices, by comparison, have grown much faster. In addition, the above chart is not a comprehensive examination of the top 50 markets. It’s merely a visual way to compare three key metrics from one point in time to another, but obviously lacks the nuance that additional explanatory variables would bring.
And perhaps most importantly: Comparing apartment rents with incomes and jobs isn’t apples to apples. Most Americans live in single-family homes, and apartment renters tend to be younger than the overall population, so national data on jobs and incomes is compositionally different than apartment data. That’s likely a big reason why income and rent growth aren’t as aligned as you might expect.
Disclaimers aside, here’s a breakdown highlighting the study’s findings in each of the nation’s four regions:
The West region is clearly the most bifurcated. All of the outliers listed on the chart’s fringes are Western markets. On the high end, San Jose, San Francisco, Denver, and Oakland were off the charts in terms of rent growth. All four metros experienced same-store rent growth in excess of 30 percent, with San Jose leading the pack, reporting huge rent growth of 39 percent. All four also posted healthy growth in incomes and jobs. San Jose was a standout with incomes rising more than 10 percent. Additionally, both Seattle and Portland posted strong results in all three metrics. On the flip side, several other western markets were poor performers. The most extreme example should come as no surprise: Las Vegas. The Sin City metro reported negative change on all three metrics and was the country’s only market to post same-store rent loss (-11%) over the last seven years. Other underperformers in all three metrics included Phoenix and most of Southern California, save San Diego.
The South region saw many of the best metro-level performances in terms of job growth and income growth. Unlike the West, those economic gains didn’t always translate into big rent growth. Top performers included Houston, Nashville, and Austin – which notched very strong gains across the board, including in rents. A trio of Texas metros also posted robust economic gains but somewhat less (though still above-average) rent growth: Dallas, San Antonio, and Fort Worth. It was a similar story in Raleigh/Durham, where rent growth came in closer the national mean despite the metro ranking among the nation’s best for income growth. Like the West, the South region also had some notable underperformers. Atlanta, Jacksonville, Memphis, Orlando, Tampa Bay and Virginia Beach/Norfolk ranked among the nation’s worst for all three metrics. New Orleans performed poorly, too, although the jobs change number was positive. Furthermore, Floridian renters have felt the squeeze, especially in Orlando and West Palm Beach where rent growth is high. According to Moody’s Analytics, median household income growth in West Palm Beach, Ft. Lauderdale, Orlando and Tampa has been minimal-to-negative over the last seven years.
With a few exceptions, the Northeast metros posted mild-to-moderate change in jobs and rents, yet above-average income growth. Good income growth was seen in Boston, Hartford, New York, Northern New Jersey, Philadelphia, and Pittsburgh. Among those, only Boston, Pittsburgh and Northern New Jersey ranked favorably for rent growth. And Northern New Jersey did so despite logging net job loss. On the flip side, Boston and Pittsburgh have been top job producers – Pittsburgh buoyed by “eds and meds” (education and healthcare) and Boston by a booming population of highly educated, upper-income young adults. A very notable outlier was New York, the only major metro to see income growth outpace rent growth over the past seven years. Despite steady wage and employment growth and tight occupancy, the nation’s densest and most expensive market ranked among the worst for rent growth.
In the Midwest, rent growth was consistent across markets – all ranging around 10 percent to 15 percent since 2007 (middle-of-the-pack nationally) – in spite of wide-ranging shifts in incomes and generally unimpressive jobs stats. Minneapolis/St. Paul ranked among the nation’s best for income growth, but it didn’t lead to better rent growth – in part due to local reluctance to push rents. A similar trend played out in Columbus. While Indianapolis produced good job gains, the metro compared less favorably in rent and income growth. At the bottom of the pack, Detroit ranked among the nation’s worst for income change and also logged net job loss. Yet the Motor City metro still managed to post rent growth around the national average.
Detroit may be Exhibit A of a point made earlier. A metro’s apartment demographics aren’t always comparable to the metro’s overall demographics. So until the industry zooms in on jobs and incomes specifically among apartment renters, comparing rents and incomes isn’t an exact science with inconsistent results.
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