Over the last several weeks we’ve profiled the hottest markets for rental property ROI. We analyzed what’s driving the growth of west coast markets like San Francisco and Seattle. We looked at the transportation and logistics boom that’s fueling Louisville real estate. And we’ve investigated why Springfield and Worcester, two unassuming cities just outside of Boston, are among the Northeast’s top prospects this year.
From coast-to-coast, it certainly seems like the housing market has recovered. Yet when we peel back another layer, we find that cities like Akron, OH and Rochester, NY still struggle. As do Pittsburgh, PA and Hartford, CT.
In the last installment of this four-part series, we’ll explore the commonalities that landed these cities at the bottom of All Property Management’s 2015 Rental Ranking Report.
To understand what’s happened in Akron, Rochester, Pittsburgh and Hartford, we must look back to the early days of the Industrial Revolution:
For the better part of the last century, local economies thrived when they had easy access to natural resources, proximity to markets, and the ability to find a talented workforce. As a result: Akron became the “Rubber Capital of the World,” Rochester evolved from the hub of “flour” production in the early 1800s to “flower” production in the mid-19th century, Pittsburgh became known as “Steel City,” and Hartford will always be remembered as the birthplace of the Colt revolver.
But the national (and global) economy has shifted recently. What was once based upon the production of goods is now based on the production of ideas and services. In today’s been “Creative Age,” cities thrive when they can attract and retain knowledge-based workers—the foundation of our modern economy.
Some cities do this well. New York City, Boston and San Francisco all attract highly-skilled workers, thanks to the concentration of hospitals and universities located in each of these cities. These institutions are breeding grounds for innovation, spinning out startups attracting major corporate headquarters. It’s a reinforcing cycle: when more people want to live in these places, more companies want to follow suit, which draws more people to these areas, etc…
Meanwhile, industrial powerhouses like Akron, Rochester, Pittsburgh and Hartford have struggled to reinvent themselves as places where creative workers want to be.
Apartments on the decline in Akron
Ohio has been front and center in the media lately given the election season. But that’s distracted from another important story: The Ohio economy has been on a downward spiral for the past fifteen years. The state never recovered after the recession in 2001, and then its economy plunged over the edge in 2008-2009.
In Summit County, where Akron is located, the number of well-paying production jobs has dropped nearly 35%, causing median household income to fall a staggering 17% in just fifteen years. Although the Buckeye State has experienced a slight uptick in job growth, most of these opportunities are in the low-wage service sector, and pay less than one-third of the wages that people earned in production-based jobs.
In addition to its sluggish economy, a recent study finds that Akron has faced the double blow of declining population and the mortgage foreclosure crisis. The city is plagued by vacant housing, and the housing it does have is ill-suited for the young professionals and middle-class families it hopes to attract. The All Property Management 2015 Rental Ranking Report confirms that Akron has the second highest vacancy rate (12.08%) of all 75 metros analyzed.
University rentals in Rochester
In the 1950s, Rochester had a population of 330,000 and was home to major corporations like Eastman Kodak and Xerox. But then Xerox relocated to Norwalk, Connecticut and Kodak faced competition from Sony, Canon and other Japanese imports. Although the company remains in Rochester today, it continues to bleed jobs.
As does the rest of the local economy. Between February 2015 and 2016, the Rochester metro area lost 4,700 jobs. Rochester, like a bulk of upstate New York, is still heavily focused on the manufacturing industry which doesn’t bode well for its future. Based upon Q1 2016 data, the Rental Ranking Report lists Rochester as the single worst metro for job growth (0.61%).
The city’s long-term prospects would be improved by tapping into its university system. A few years ago, the University of Rochester, which hosts both the foremost optics research center in the nation, and the Eastman School of Music, a premier music institution, surpassed Kodak as the city’s largest employer. The Rochester Institute of Technology and several other small colleges are located nearby, but by and large, students don’t stay in the area after graduation. Rochester, NY is considered one of the worst large metros for its retention of college grads (34%), which further weakens the economy and hampers demand for rental housing.
The slowing steel economy in Pittsburgh
During the latter half of the 20th century, Pittsburgh’s eulogy seemed already written—just waiting to be published: steel mills were closing and issuing thousands of pink slips in the process. Between 1970 and 1990, the city lost a full 30% of its population. “Well, that was that,” recounts crane operator Ed Buzinka on his last day of work at a U.S. Steel Corp. structural mill. “It’s over. But I’ll tell you what. It was a good run while it lasted.”
Pittsburgh has managed to pull itself up by its bootstraps better than most post-industrial cities, but its economy continues to lag. According to the 2015 Rental Ranking Report, Pittsburgh is experiencing among the slowest job growth in the nation (3.19%). Housing demand remains weak, with the average property sitting on the market for 87 days in Q1 2016 before it ultimately sold—the second lengthiest period of all 75 metros analyzed. Compare this to Seattle (8 days), Portland (15 days), and even Grand Rapids (21)—markets in which houses all sold in less than three weeks.
The insurance business in Hartford
Unlike some of the other postindustrial cities profiled here, Hartford successfully reinvented itself as a hub for the insurance industry. Located between Boston and New York, insurance companies were able to meet with customers throughout the region. As the finance and legal industries in these markets grew, so did the demand for insurance products—and for many years, the Hartford economy did well.
But a string of bad policy decisions unraveled the state’s economy. Government spending is out of control, with year-after-year tax hikes that aren’t enough to close budget gaps or fulfill the state’s unfunded pension liabilities. Today, Connecticut is considered the least-business friendly state in the nation. Between 1996 and 2006, before the financial meltdown and recession, the number of Connecticut small businesses declined by 2.2% compared to a 10% increase nationwide. Coming out of the recession, a number of corporate tenants (notably, General Electric) have decided to cut ties and relocate elsewhere.
As a result, demand for rental housing is low. Using All Property Management’s Future Rental Availability Index, an estimate of the housing unit shortage in a metro area, we find that Hartford ranks dead last on future housing shortage. In other words, there’s plenty of housing to go around. Landlords are hard pressed to increase the amount they charge for rent. This is confirmed by another stat in the Rental Ranking Report: the Hartford metro has the single lowest rent variance in the nation (-6%), indicating that rental prices are on the decline.
What’s more, absent demand, Hartford property values are slow to appreciate. Whereas some markets like San Francisco, Miami and Denver have appreciated more than 6.75% this past year, Hartford properties have appreciated a meager 0.79%.
It’s not all gloom and doom for these former boomtown cities.
The cap rates for investors in both Akron and Rochester are among the highest in the nation (10.40% and 9.71%, respectively). Rental property owners in these markets are taking high risk, but in return are generating tremendous returns. Depending on an investor’s risk profile and time horizon, these markets could turn out to be great opportunities—particularly those who can no longer get a foothold into primary markets like New York, Boston and LA.
Interested in learning more about a specific market? Download a full copy of the 2015 Rental Ranking report here.Read more on Real Estate Markets