Pricey rentals lift Cincinnati rates to record

New luxury apartments in Greater Cincinnati and Northern Kentucky are pushing average rents to record levels.

But improvements in the economy, property maintenance needs and rising demand for rentals are pushing landlords to raise rates for renters at all income levels.

Average monthly rent rose for the sixth consecutive year and closed 2014 at $804, which was up 3.5 percent from 2013, according to an annual CBRE Cincinnati landlord survey. Commercial real estate information firm Reis said landlords collected $754 a month from tenants, up 3.1 percent from a year earlier.

"It's a good time to be in the apartment business right now," said Becky Alejandrino, chief operating officer of Downtown-based Fath Properties, which has more than 5,500 of its 8,000 apartment units in the Cincinnati and Dayton areas.

Nationally, rents rose about 3.4 percent to $1,172 a month, the fastest rate of growth since 2007, according to New York-based Reis.

Driving the market

Recent rate hikes are partially due to landlords catching up for the past 10 to 12 years, when there was little rent growth, said Dave Lockard, a Downtown-based senior vice president at CBRE. Average effective monthly rent – or what landlords collected minus rental promotions – was about $627 a month in 2004.

Lockard said today's market has some similarities to the late 1990s and early 2000s. Robust home-buying activity in the 2000s helped temper demand for rentals in the region. But then the Great Recession and housing market collapse sent a surge of people looking for apartments. The harm from the economic slowdown forced landlords to hold rents steady or court tenants with free rent promotions, he said.

The desire to not maintain a single-family home may be one factor in rising demand, said Tonya Beckner, a Deerfield Township-based senior operations manager for Miller-Valentine Group. There's also people – many who are young college graduates – who are struggling to meet tighter qualifications to obtain get a mortgage loan.

"A lot of millennials are getting out of college and have a huge amount of debt that it's just a lot more feasible for them to be able to rent," Beckner said.

Lockard said Cincinnati still lags peer markets such as Columbus and Indianapolis in terms of adding new apartment units. Companies tracking Cincinnati's multifamily market show the region's rental vacancy rate to be between 3.2 and 6.5 percent.

Construction will be critical to determining whether that vacancy rate stays flat or swells higher. Victor Calanog, Reis chief economist and senior vice president, said the economy and labor market are poised to improve in 2015 and will likely provide enough demand to keep occupancy from deteriorating significantly.

"Over the new year or two, we'll see some moderation with rents because we have a continual new supply coming onto the market now," said Shaun Bond, director of the University of Cincinnati Real Estate Center.

Increases hitting each segment

The newest apartment properties got more expensive for renters in 2014, with an average increase of nearly 10 percent to $1,072 a month, according to CBRE Cincinnati.

Opened in 2011, Current at The Banks was among the projects that caused developers to consider adding more upscale apartments in the region. With the Downtown rentals costing nearly $2 a square foot, Rusty Lykes, senior vice president at Blue Ash-based Hills Properties, said developers saw the units lease quickly. This helped establish a new standard – apartments featuring the latest finishes and lots of amenities.

The company's 360-unit Palmera project in Deerfield Township and the 272-unit Savoy, which is under development in West Chester Township, reflect that trend, he said.

"Some early successes certainly created more appetite from the developer side to build this stuff," said Lykes. "The Cincinnati customer has said this is what we want."

Lockard said rising construction costs are driving developers to build for "lifestyle renters," who can afford to pay higher than average market rents.

Supply and demand are also driving averages higher for less expensive rental units. Real estate industry analysts say there hasn't been many new low- or moderate-income apartments built in the region, and hundreds of outdated or obsolete units have been removed from the market in recent years.

Monthly rents at Class B properties, or those typically between 10 to 25 years of age, rose about 2 percent to $735. Class C properties are the oldest of the bunch, but prices for those units rose about 6 percent to $626 a month.

Beckner said Dayton-based Miller-Valentine, which has about 12,000 rental units around the country, said Class B owners tend to focus on keeping their buildings up to compete with the brand new properties.

The hot rental market has also encouraged investors to scoop up older rental properties in an effort to rehab them so they can increase rents, Bond of UC's Real Estate Center said.

But if people fret about rental rate hikes in Cincinnati, it could always be worse. It could always be worse. Effective rent in New York averages $3,223 a month.

"Rents are so cheap here even with the increases," Fath Properties' Alejandrino said.

Rent costs how much?

New York-based commercial real estate firm Reis publishes average monthly rent costs in the nation's largest metropolitan areas. Here's a sampling of the results for fourth quarter of 2014 asking rents, and comparisons to the fourth quarter of 2013.

Cincinnati $785, up 2.8%

Columbus $776, up 4%

Cleveland $794, up 2.2%

Dayton $680, up 2.1%

Indianapolis $756, up 2.5%

Lexington $692, up 1%

Louisville $728, up 3.6%

Pittsburgh $935, up 3.4%

San Francisco $2,299, up 6.7%

New York $3,281, up 2.9%