Last updated Apr 10, 2021
Disclaimer: This article is not legal advice. Any legal information is not the same as legal advice, where an attorney applies the law to your specific circumstances, so you should consult an attorney if you’d like advice on your interpretation of this information or its accuracy. You may not rely on this article as legal advice, nor as an endorsement of any particular legal understanding.
Just as with other goods and services, the law of supply and demand has a major impact on the value of rental properties and on their rental rates. From determining where to invest to determining exit strategy, every aspect of the rental property life cycle is impacted by the number and quality of units available in a given market. That’s why rental market saturation is such an important metric to consider when putting together your rent estimate.
For property owners, your cash flow depends on an accurate reading of the local market as well as the trends that affect each property’s value and rental rate. In order to better understand your property, and its place in your portfolio, you need to correctly gauge its current and future potential.
As a an agent or property manager, understanding how to effectively market and manage the properties under your supervision depends, in part, on the conditions in your local area. By gathering data on your own properties and similar properties you can calculate rental market saturation and develop a more meaningful rent estimate for each property you manage.
Determining rates of rental market saturation
Determining the rental market saturation in your local market involves a number of factors, including the following:
- Vacancy rates: It is important to know not only the vacancy rates for your units but also the rate for comparable properties in your local market. Low vacancy rates alone do not indicate market saturation, but they can give you a snapshot of current conditions as well as helping you analyze historic trends.
- Renter density: You will want to look at renter density trends in your market, or the percentage of renters vs. the percentage of homeowners. In addition, you’ll want to look at renter density over time and decide what patterns are at work both short and long-term.
- Changes in the number of households: There are a variety of reasons that the number of households change over time, from marriages and divorces to the growth or decline of the local job market. Markets can experience shifts due to less predictable factors as well, like becoming the setting for a television show or becoming popular with a social media influencer.
- New construction units: The number of units coming online in a market can have a significant impact on market saturation. So, too, can a decline in multifamily construction starts, resulting in lower vacancy rates. In addition, new construction can change the market saturation for a particular market segment or for a small micro market, leaving the larger market saturation rate virtually unchanged.
- Housing units in decline: Just as new units can affect a market, so do units that are in disrepair or units that have been damaged or destroyed due to a natural disaster. If a market loses a large number of rental units at once, this can have long-term impacts on market saturation.
- Absorption rates: One factor to consider when looking at market saturation is the amount of time it takes for the market to absorb new units. If newly available rental properties are sitting vacant for a significant amount of time before they are leased, this may be an indicator that the market is nearing its saturation point.
- Income distribution: Market saturation can occur at different rates among different segments. Therefore, rental properties that are out of sync with economic conditions in a market may be slower to fill than units that are better suited to that market.
- Unit distribution: Market saturation can occur at different rates among different types of rental units. For example, in an area with a large number of single professionals, studio apartments may rent faster and with more frequency than larger units with multiple bedrooms and baths.
- Housing affordability: Rental market saturation may be severely impacted by housing affordability challenges. This can lead to shifts in market demand as well as unit distribution.
- Land Use: Changes in land use can lead to increased or decreased market saturation, depending on whether the change is perceived as positive or negative. For example, building a new hospital may lead to temporary market saturation as employees move into most of the available units in the area. On the other hand, building a new landfill may lead to a long-term decline in demand.
Analyzing rental market conditions for changes in saturation
While you may be able to develop a fair estimation of rental market conditions in your current market, it is important to look at historical trends for changes over time. You’ll also need to think ahead and try to make informed predictions about future changes and development.
Housing market shifts
Housing market shifts can occur for a variety of reasons:
- Economic changes: High or low unemployment rates, shifts in foreclosures, and a number of other economic factors can impact the housing market at large.
- Lifestyle changes: Attitudes, trends, and other factors can have an impact on the local rental market. For example, renters may seek more outdoor amenities, more walkability, or more luxurious spaces, resulting in shifts in the design of rental units and communities.
- Demographic changes: As a population grows older, members of a demographic cohort may choose to sell their family homes and rent smaller homes in active adult communities. By contrast, Millennials, by delaying marriage and homeownership until later in life, caused shifts in the housing market, especially in desirable urban areas.
New commercial development
Look at trends both in your local area and in areas like yours throughout the country. For example, many so-called secondary markets have seen growth that outstrips that in major urban or suburban markets. Some suburban distribution centers for major manufacturers have seen exponential growth in residential demand as employees seek out a shorter commute and demand grows for retail and other services close to their employers.
Local market job loss
Market saturation can shift dramatically in the case of a major employer or commercial category going out of business. These shifts may come in the form of a declining population, causing less market saturation, or in the form of a shift from home ownership to renting, increasing market saturation.
Adjustments in rental unit availability
The number of available rental units in a given market or consumer segment can change for a variety of reasons. These include:
- New development which includes residential rental property
- Temporary or permanent destruction due to storm or fire
- Conversion of rental units to condominium or co-op units
- Conversion of privately owned single-family properties to investment properties
- Conversion of residential property into commercial property through rezoning
- Conversion of mid-grade properties into luxury properties through renovation
- Conversion of mid-grade properties into declining properties through neglect
Determining rates of rental market saturation
A comprehensive analysis of rental market saturation should inform your management strategy for the rental properties under your supervision. In particular, rental market saturation will have an outsized impact on the amount of rent you are able to charge for your property. When you are developing your rent estimate, you will want to take into account market saturation in your area both now and in the foreseeable future.
If demand is high in your market, you may be tempted to raise rental rates accordingly in order to take advantage of the increase. This may be a good idea if you have a reasonable expectation that demand will continue to increase. It may be a bad idea if the demand represents a temporary shift or market adjustment.
In addition, you’ll want to balance profitability with tenant retention. A major rate hike will almost certainly drive many of your tenants away as they seek out more affordable housing options. You will need to balance the potential rent rate increase with the possibility of having multiple properties experiencing turnover, vacancies, and onboarding at the same time.
Effective responses to a saturated rental market
In the event of an over-saturated market, you may be concerned about your ability to keep your units filled without lowering your rental rates to an unsustainable level. The good news is that there are ways to attract new renters and maintain or even raise your rates, even in the case of a fairly saturated market.
The first place to start is to consider who you think of as your ideal renter. Are there restrictions that you have put in place that are keeping a significant portion of your potential rental market away? Consider changes to your application, approval, and onboarding processes in order to bring in additional qualified applicants.
Secondly, in a saturated rental market, tenant retention becomes more important than ever. Evaluate your responsiveness and identify practices that will allow you to add value and keep tenants in place for the long term. Communicate effectively and follow up so that you can ensure your most reliable tenants remain in place.
Once you have determined that you need to create a strategy for reaching out to new renters, consider the following:
What makes your rental properties different from other properties in your area? Perhaps you offer a particularly desirable location or added amenities. Perhaps you offer a large number of oversized units or expanded outdoor space. Look at the particulars of your rental market and find the thing that sets you apart from the competition.
Once you have determined how to differentiate your properties, you will want to create a brand identity that expresses that difference. If you represent a number of different types of properties, you may want to create different brand identities or different categories within your brand to highlight those differences.
How are you marketing the properties you manage? You may want to create new marketing around your unique value proposition and your rebranded properties. You may need new photography and new copywriting. You may want to pursue new platforms or strategies for your marketing. You may benefit from working with a PR or marketing group on a plan to bring more attention to your properties.
If there is a great deal of competition in your market, you may be able to renovate your existing properties in order to make them more desirable. Begin early converting units as they become vacant in order to minimize downtime and carrying costs. Ensure that your rent estimate covers both the cost of the renovation and the increased market value of the property itself.
If your analysis of the local market tells you that your market segment, rather than the market as a whole, is oversaturated, you may want to consider renovating your properties in order to change their target audience. For example, you may find that you have a glut of studio apartments in your area. You may find that combining these into larger floor plans will allow you to both raise rental rates and appeal to an underserved segment of your market.
Think long term when responding to rental market saturation
While a saturated rental market can present significant challenges, it is important to think long-term in responding to those challenges. By preparing yourself with information and analysis ahead of time, you can be proactive in responding to shifts as they occur.
If you are a rental property owner, your investment strategy will benefit from an informed appraisal of your local market saturation and potential. If you are a property manager, your investor clients will benefit from your expertise in evaluating local market conditions and the options and opportunities they present.
As you develop a rent estimate based on your market saturation analysis, you’ll need a great deal of data on the local market and trends over time. RentSpree’s rent estimate offers you a comprehensive and affordable solution designed to put all of the facts in front of you so that you can make more informed choices.
With vacancy rates, comparable property information, and days on market statistics, you’ll have the tools to create an accurate picture of your market now so that you can better plan for the future. The rent estimate recommendation you’ll receive from RentSpree offers unparalleled accuracy based on sophisticated market insights and analysis.
Ready for more? Schedule a rent estimate walkthrough to learn more about the product and all of the ways that you can put it to work to maximize the value of your rental property.
Continue to Chapter 5: Conditions for Rent Increase and Decrease or jump to a different article.