Although it may not seem like it, average apartment rents are taking a smaller bite out of bank accounts these days. Year-over-year average rent growth among mid-quality, three-star apartments declined during the third quarter for the first time in 2014, while average rents in higher quality four- and five-star apartments have been dropping since the second quarter of 2013.
Until now, the rent gap between the two sets of apartments had been narrowing. Average rents for a three-star apartment in the Washington metropolitan area are $1,464 per month on average, compared to $1,944 per month at a four- or five-star building, a difference of roughly 28 percent. Ten years ago, however, that difference was even larger at about 39 percent.
Why has the rent gap shrunk? Part of the reason is that a wave of new apartments hit the region in 2007, delivering about 11,400 new units, 120 percent more than the historical average number of units produced per year from 1983 to 2006.
This new supply forced landlords at some four- and five-star buildings to reduce rents in order to fill their units. As a result, rent growth dipped into the red briefly in 2008, and then again for most of 2009. The Great Recession also had an impact, as some former four- and five-star renters moved to older, cheaper three-star buildings to save money. This increased demand for three-star units, allowing landlords there to continue raising prices.
In recent years, the effective rental growth rates of three-star and four- and five-star buildings have diverged even further. Just as in 2007, this is largely a result of the recent construction boom in the Washington area. An unprecedented number of new apartment units (about 24,000) have arrived in the area in the past two years, increasing the total apartment inventory by roughly 5 percent.
That new supply wave cut rents for four- and five-star apartments even further, even as rents at three-start apartments continued to outperform. But the narrowing may be slowing as the wave of supply takes its toll on three-star rents as well, working in renters’ favor.
Maeve Gallagher is a real estate economist with CoStar Group in the District.
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