Apartment Affordability: Are Small Buildings Gentler on the Wallet?
The balance of amenities and affordability are arguably the most important drivers for a renter’s choice of location. As rent growth has outpaced wage growth, the issue of apartment affordability has acquired new urgency.
While apartment rents have risen at a robust pace following the financial crisis, average hourly wages have grown more slowly. Additionally, the largest and fastest-growing cohort of renters – millennials – are typically lower on the wage spectrum than their more senior peers. These factors translate to renters having to pay a growing share of their income toward housing costs.
Small Multifamily Renters Have Lower Incomes
When it comes to positioning properties in a competitive rental market, the ongoing evaluation of affordability constraints is even more important for owners and operators of small properties. As shown below, the 2014 American Community Survey shows the renters’ average household income in small properties was $43,000, about 17% lower compared to that of renters in large buildings.
Further, renters in small buildings have experienced lower income growth over the last decade. Small property renters saw their household incomes rise by an average of 2% per year between 2006 and 2014. In contrast, renters in large buildings experienced an annualized growth of just over 3%.
Apartment Affordability Gap Shrinking
As noted in our previous post, renters in large buildings pay a significant premium for similar-sized units when compared to small property renters. This premium reflects higher levels of amenities and proximity to the urban core. As it turns out, this rent premium is larger than the difference in income between small and large building renters — but it is also shrinking. Large building renters, on average, spent 42% of their household income toward their monthly gross rents, up from 41% in 2006. This suggests that apartment affordability is becoming a more significant issue for large apartment renters as well.
In small properties, renters spent 40% of income on rent, up from 38% in 2006.
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