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Editorial From Dec. 28 Tennessean:
Rent eats up larger chunk of Middle Tennesseans’ income
By Brandon Gee
THE TENNESSEAN
An increasing number of Middle Tennesseans are spending more than they can afford on rent, new data from the U.S. Census Bureau show. In Nashville alone, 4 in 10 renters spend more than 35 percent of their income on rent.
As a rule of thumb, financial experts advise people not to spend more than
35 percent of their income on housing. All of those who are spending that much or more are not intentionally making bad financial choices. Some are families trying to hold onto their homes after losing their jobs or taking a pay cut.
Nowhere in Middle Tennessee is the trend more pronounced than in Wilson County, where nearly 50 percent of renters spent more than 35 percent of their income on rent in 2009, compared with just 25.3 percent in 1999. When adjusted for inflation, median rent in Wilson County increased from $730 in 1999 to $817 in 2009.
“You can’t even get an apartment here for $600,” said Jay Bradshaw, principal broker at Cumberland Real Estate in Wilson County. “A two-bedroom house is going to cost you at least $700.”
Bradshaw said that most apartments in the county are income-restricted and that many renters who don’t qualify as low-income are forced to lease more-expensive single-family homes. Recently released census figures from the American Community Survey include the income-restricted units.
Even those who do qualify, such as Vickie Trent, may still struggle. Earning $10 an hour at Lowe’s, Trent was living in a two-bedroom apartment that cost $650 a month and recently increased to more than $700.
“I was just barely scraping what I could get to pay the $650,” Trent said. “It didn’t go nowhere between your electricity and food and other bills you have to pay.”
With a lower rent, Trent said, she would have been able to start a savings account. That would have helped when she lost her job last month. Instead, Trent had to give up her apartment and take a room in her mother’s house for $50 a week. Her unemployment check is $198 a week.
“You can’t afford rent on that,” Trent said. “If I didn’t have my mother, I don’t know what I’d do.”
The situation has strained local aid organizations. Caroline Duggan, director of the Mt. Juliet Help Center, said that in the past year she has seen many people take advantage of utility assistance and the food bank for the first time. Big Brothers of West Wilson County has received eight calls asking about rental assistance in the past eight months — the same amount as in the previous two years.
Spokeswoman Lisa Gallon said the Metro Action Commission has awarded more than $300,000 in federal and local funds for rent and mortgage assistance since July 1.
Household incomes fall
Other Middle Tennessee counties have seen only modest increases in the median rent when adjusted for inflation, which reveals that most of the increase in renters spending more than 35 percent of their income on rent is because of declining household incomes. When adjusted for inflation, the median rent in Davidson County actually decreased from $792 a month in 1999 to $783 in 2009. But the percentage of people spending 35 percent or more of their income on rent has increased from 27.8 percent to 39.1 percent.
Courtney Vrablik said her family of four pays nearly half the household income for a three-bedroom Nashville apartment. She said the family isn’t trying to live beyond its means, but her husband couldn’t find a job that paid enough and instead started his own business.
“It’s pretty scary,” said Vrablik, who said she would prefer to be putting more money toward student loans, food and finding at least one replacement for the family’s two 10-year-old cars.
In Sumner County, real estate agent Gwen Dowland said she is spending more time renting properties than she ever has during her 20-plus years in the business. She said many people can’t get approved to buy a house, and many who would normally sell their homes prefer to rent them until the economy rebounds.
Unsustainable condition
The trend of renters paying more than they can afford suggests an unsustainable condition emerging in the local rental market that could cool one of the only active real estate sectors, apartments. Over the past year, apartments have seen healthy increases in rent and occupancy.
Nashville-area apartment managers said they are surprised by what the data show. A steady increase in occupancy and rents has fueled developer interest in local apartment projects.
“We haven’t added a lot of new jobs, but we are filling up apartments,” said Woody McLaughlin, chairman of Parthenon Properties.
In the third quarter, occupancy increased to 94 percent in the Nashville market compared with 91 percent in the third quarter last year, according to the Greater Nashville Apartment Association. The average apartment rent increased from $742 to $784.
“It certainly would be a concern,” Charles Carlisle, CEO of Bristol Development Group, said of the data. “In an ideal world, you would want to see rents at a level of income that is sustainable.”
Nonetheless, Carlisle said he isn’t concerned for his company, which focuses on the downtown and West End submarkets. Carlisle said there are so few apartments in those areas that he won’t be concerned until the pent-up demand is met. The company’s recently opened 1700 Midtown project is 98 percent full, Carlisle said.
Kirby Davis, president of First Management Services, which manages 3,000 units in Nashville, also said he was surprised by the data. He said his company requires tenants to show they earn at least three times the rent to qualify for an apartment. He agreed that the data probably primarily reflect a reduction in wages, which he said is bad news more for discretionary spending than for the local rental market.
“There hasn’t been much increase in rents,” Davis said, “so I don’t think you’ll see much decrease in rents.”
Editorial Response from Kirby Davis, First Management Services
Is rent in the Nashville MSA too high? The Tennessean’s December 28th article on the latest census data implies it is. The article ends by stating that the trend of people paying an ever increasing percentage of their income toward housing costs is unsustainable.
It is important to keep in mind that the census data on which the article reported are the average of a wide range of housing, most of which consists of single family dwellings. Single family housing offers none of the economies of scale that multifamily living does. It costs much less per home to maintain a pool that is used by two hundred families than it does for one. Likewise with a fitness center, tennis courts, maintenance and all the other costs associated with real property. This simple fact is alluded to in the editorial when the Wilson County realtor says he has to put his clients in “more expensive” single family homes.
Wilson County’s rental market also illustrates another obvious facet of economics and statistics – newer housing costs more. Ten years ago, the Greater Nashville Apartment Association tracked fewer than five hundred apartment units in Wilson county most of which were subsidized. Today there are well over one thousand conventional units in that submarket many of which are in new class A properties.
The corollary of that principle is that some of the older housing stock in Nashville provides exceptional value. At the end of the third quarter of 2010, there were five submarkets where average rents were less than $700. That means there may be apartments in those submarkets that rent for as little as $500 per month. Furthermore, the statistics the Census Department and the GNAA report do not factor in specials. One month free rent averages out to an 8.33% discount reducing the $750 rent on a two bedroom apartment to $687.50 over a year’s lease.
That being said, there is no question that only the strongest submarkets can support new construction at present. It costs approximately $110,000 per unit to build apartments in the Nashville area and around $4,500 per unit per year to operate them. That means an investor will need to get average rents of around $1,150 to $1,200 to justify the risk inherent in real estate development. Only the West End/Downtown, Franklin and Mount Juliet areas have rents anywhere close to that.
Even $300 per month rent is too much when you are living on unemployment. One advantage of renting, however, is that you do not have to worry about losing money on your largest investment when that great job opportunity comes up 30 or 3,000 miles away. Americans’ willingness to move to where the jobs are will play an important role in how quickly we recover from the Great Recession.
The census data are a snapshot of a low point in the economy. America will recover, Nashville will recover and the rental market will continue to provide a valuable housing alternative to people at all income levels.
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