Landlords Raising Rents as Demand Outpaces Supply

Apartment rents will continue to go up nationwide as people wait to buy homes

By Venessa Wong

• View Slide Show

The good times are over for renters. At the beginning of the housing bubble the rental market stumbled as landlords were forced to cut their rates to hold onto existing renters or attract new ones. Many landlords even threw in all kinds of concessions and discounts to fill their units. Now rents are on the rise again. Not because the economy is improving—but because it remains stagnant.

It's a classic example of supply and demand. As Americans have lost their homes or continue to put off buying a home, there are more renters than ever. With inventory constrained, landlords increased rents. In 2010, rents nationwide rose an average 4.2 percent. In 2009, by contrast, landlords offered greater discounts to attract tenants, and effective rents fell 5.9 percent. According to AXIOMetrics, an apartment market research firm in Dallas, last year was one of the best periods for landlords over the past 15 years and may mark a turning point in the short term.

Rents recently rose again at the Lofts of Greenville, a luxury property in Greenville, S.C. Occupancy in the chic, renovated textile mill built in 1900 reached 100 percent in February, but even before that, the landlord, responding to strong demand and low vacancy, made incremental rent increases and eliminated such concessions as one free month. Rates in the Lofts now start at about $780 for one-bedroom units (a 16 percent premium over the average monthly rent in the area), but apartment hunters have not turned away. "We have more appointments this week than we have had in the last few months," says property manager Kelly Beasley, who expects to maintain full occupancy in 2011.

Across the Greenville metro area, effective rents (which include concessions) increased 11.2 percent year-on-year in 2010 to $669, the biggest jump nationwide. As Greenville's rental market heated up—vacancies there fell to 7.7 percent last year, from 9.5 percent in 2009—home sales dropped 3.7 percent year-on-year, according to data on closed sales in the Greater Greenville Association of Realtors Multiple Listing System.

AXIOMetrics expects the rate of increase to jump to about 5 percent nationwide this year before cooling to 4.6 percent in 2012, to 4.1 percent in 2013, and 3.4 percent in 2014 as new apartments now in the pipeline gradually become available. "My advice to renters is to sign as long a lease as you can" to lock in current rates, says AXIOMetrics President Ronald Johnsey.

Biggest Hikes

AXIOMetrics tracks 88 metro areas nationwide and surveys about 16,131 apartment properties, with more than 4.3 million units. As U.S. rents rose 4.2 percent in 2010, overall consumer prices rose only 1.6 percent, according to the U.S. Bureau of Labor Statistics. U.S. vacancies fell to 7 percent, from 8.1 percent, and concessions in the fourth quarter dropped to 5 percent, from 7 percent. (A concession of 8.33 percent is equivalent to one month of free rent on a 12-month lease.)

After Greenville, the metro areas with the highest rent increases are Chattanooga, at 10.4 percent (the area led job growth in the state in 2010), and Savannah, Ga., at 8.4 percent (such employers as Gulfstream Aerospace announced plans to hire). On the West Coast, rents in Portland, Ore., and San Jose jumped about 8 percent.

The New York-Wayne-White Plains area had the 18th biggest rent hike last year, 6 percent, but AXIOMetrics expects the metro will jump to first place in 2011, with an increase expected to be 7.8 percent.

In only two cities, Las Vegas-Paradise and Cape Coral-Fort Myers, Fla., did effective rents fall in 2010.