Renters face tight apartment market
Renters face tight apartment market
Easing real-estate market, condo conversions crimp apartment stock
By
Amy Hoak, MarketWatch
Last Update: 7:19 AM ET Jun 26, 2006
CHICAGO (MarketWatch) -- With a budget between $1,200 and $1,300 a month, Charlene Conston thought she would easily be able to find an apartment in Southern California's San Fernando Valley.
Forget about being priced out of owning a home, Conston, 55, feels priced out of the rental market, too. To find a two-bedroom apartment for herself and her college-age daughter, she's using an online database she had to pay to tap into.
Her story is a common one in some California markets, said Delores Conway, director of the Casden Forecast at the University of Southern California's Lusk Center for Real Estate.
Los Angeles County has a 2.8% vacancy rate, down from 3.2% a year ago, she said. The competition for rentals has allowed landlords to raise rents by 7% on average throughout the county. Rents in Hollywood went up 9%, she said.
Other regions are seeing a similar tightening.
The nation's 57 largest metropolitan areas posted an average vacancy rate of 4.4%, according to a March survey by M/PF Yieldstar, a real-estate research firm. The rate was 5.6% a year ago and 7.3% when the rental market bottomed out in late 2003, said Greg Willett, the company's vice president of research and analysis.
Annual rent growth was 4% as of March, the survey found, and more rent increases are anticipated. A rent "bump" of 5% to 5.5% should hit tenants in 2006, Willett said.
Why are rental occupancy rates up? The reasons vary by location, but there are a few general trends fueling demand for rentals.
Fewer renters jumping into homeownership
The rental market is the complement to the housing market, Conway said. So when homeownership looks less attractive, renting looks more attractive.
And buying a home is certainly looking less pretty these days for those on the fence between buying and leasing. Soaring appreciation rates in some markets have caused home prices to become less affordable; rising mortgage interest rates aren't helping either.
It's a change of pace from the past several years, when people bought homes earlier than expected, said Mark Obrinsky, chief economist for the National Multi Housing Council.
"Now that there is a sense of pause, there may not be the same kind of frenzy to jump in," Obrinsky said.
A bigger pool of renters in turn creates more demand for rental units. This gives apartment owners the go-ahead to raise rents and offer fewer concessions, said Jeremy Bencken, chief executive of ApartmentRatings.com, a Web site that allows tenants to opine on their experiences living in specific rental properties.
Landlords have "been basically sitting on their hands, watching renters exit the market and find homes," he said. If the renter was unsatisfied, there was enough room in the market to move to another, more desirable unit. That often isn't the case anymore.
Supply and demand
Also working against a renter is the fact that in many markets there simply aren't as many units to choose from as there used to be.
Many investors converted apartment buildings into condominiums in recent years, and that had an effect on the rental stock.
There were 198,532 condo conversions in 2005, the year the trend hit its peak, according to research from Real Capital Analytics, a firm that tracks the commercial real estate market. The number of conversions in 2006 is expected to finish far below that level, said Dan Fasulo, director of market analysis for the firm.
Some of that apartment stock could return to the rental market when individual owners rent out units instead of reselling them, as they might have originally intended when the market was hot. This is creating what Lisa Trosien calls a "ghost market": Rental units that aren't counted in traditional apartment stock. Trosien, who operates ApartmentExpert.com, studies the apartment industry and speaks to groups on the trends she spots.
Bencken, of ApartmentRatings.com, says that for tenants, a condo rental can be a good situation. The "unwilling landlords" are often looking for reliable tenants who will stay for a while. They may agree to a better deal from the renter's perspective.
The current supply and demand conditions may also inspire new apartment buildings, Conway said.
"There's a lot of interest by the big REITs," she said, adding that new investments may help beef up rental stock down the line.
But so far, apartment construction activity hasn't increased, according to M/PF Yieldstar research. This year, about 160,000 apartment units will be delivered nationally, compared to about 150,000 units in 2005, Willett said.
At the same time, condo development is booming: About 210,000 condominium units will be finished in 2006, compared with 120,000 last year, he said.
"This is the first time ever that condo deliveries will top apartment completions," Willett said in an e-mail interview.
"Development costs are holding back the run-up in apartment starts that normally would occur as occupancy tightens. Combining the rapid run-up in land prices that has occurred in recent years and an unprecedented surge in the costs of construction materials, it's now hard to make the financials work on a new development deal in many places," he said.
Looking forward, a change in demographics
Demographic pressures will also play into rental housing's overall picture in coming years, when the children of baby boomers -- dubbed "echo boomers" or "Generation Y" -- enter the market.
To reach that demographic, many listings are migrating online. Younger renters are likely to do an initial search for an apartment on the Internet, said Daryl Toor, spokesman for Rent.com, an apartment listings site owned by eBay. Also popular for apartment hunting is Craigslist, of which eBay owns 25%.
And with Generation Y just beginning to enter the rental market, some rental firms are experimenting with different advertising techniques to reach the demographic, Trosien said. They're discovering what people in this group want from their living spaces and how they make their rental decisions -- often with their parents at their sides.
"Ninety percent of the time, they want mom and dad's approval," Trosien said. "You're selling to Generation Y, but also their parents."
