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Additions to the Rental Stock Are Increasingly at the Higher End Share of recently Built Units 23% 15 1 22% 38°/a 29 2009 9% 9% , 40% 19% 15°!a 2016 Monthly Housing Cost Under$650 11 $050-849 Nd $650-1,090 N $1,100-1,499 ® $1,500 and Ovor Notes'. Recently built units In 2991 129181 were constructed In 1999-2991 12914-29181. Monthly housing posts include rent and utilities and are in constant 2016 dollars, adjusted for inflation using the CPI -U for All Itoms Less Shelter Data exclude vacant units and units for which no cash rent Is paid. Source: RIC tabulations of US Census Bureau. 2991 and 2916 American Community Survey 1 Year Gstimates, ing labor and materials. According to estimates from RS Means, the costs of building a basic, three-story apartment building increased by 8 percent from 2016 to 2017 alone. Tight land use regulations also add to costs by limiting the land zoned for higher -density housing and entailing lengthy approval processes. Given these high development costs, most of the demand for low- priced rentals must be met by older units. Only a fifth of existing units rented for under $650 a month in 2016, and nearly half of these units were built before 1970. Affordably priced rentals are frequently located in smaller multifamily structures, with one-quarter of low- cost units in buildings with 2-4 apartments. In many cases, the supply of these so-called naturally occurring affordable rentals is replenished as rents on older housing fall due to aging and obsolescence. But with overall rental demand strong, particularly in centrally located communities, rents for an increas- ing number of once -affordable units have become out of reach for lower-income households. At the same time, the rents charged for units in neighborhoods with weak demand may not support adequate maintenance, leaving those rentals at risk of deterioration and loss. Given the lack of new construction of lower-cost rentals, preserving the existing stock of privately owned affordable units is increasingly urgent. RENTAL MARKETS AT A TURNING POINT Rental construction led the housing recovery, rebounding nearly four -fold from the market trough in 2009 to 400,000 units in 2015— the highest annual level since the late 1980s. But after moving sideways in 2016, the pace of multifamily starts has fallen 9 per- cent through October 2017. The slowdown has occurred in markets across the country, but is most evident in metros where multifamily construction had been strongest. In addition to the slowdown in construction, a variety of measures sug- gest that the rental boom is cresting. RealPage reports increasing slack in the professionally managed apartment market, with vacancy rates rising over the past year in 94 of the 100 metros tracked. The clearest signs of loosening are in the higher -priced Class A segment, where the vacancy rate was up 1.5 percentage points year over year in the third quarter of 2017, to 6.0 percent (Figure 3). vacancy rates in the lower-cost Class C segment also rose but remain quite low at 4.1 percent. Apartment rents are also increasing more slowly in all three seg- ments of the market (Figure 4). This deceleration has appeared in all four regions of the country and in large and small markets alike. Even so, conditions in selected markets—particularly smaller metros and locations in the Midwest, such as Cincinnati and Minneapolis— were still heating up. Over the last six years, increases in the median rent have exceeded inflation in non -housing costs by more than a full percentage point annually, with the largest gains in the South and West. Median rents have risen at twice the national pace in markets with rapid popula- tion growth, such as Austin, Denver, and Seattle. And within these fast-growing metros, rents in previously low-cost neighborhoods rose nearly a percentage point faster each year than in high-cost neighborhoods. Meanwhile, rental property owners continue to benefit from still healthy increases in operating incomes and property values. According to the National Council of Real Estate Investment Fiduciaries, net 3