Apartment landlords are seeing a surge in rentals as mounting foreclosures reduce homeownership and an improving job market prompts young adults to find their own places. The number of occupied apartments increased by 215,000 in the 64 largest U.S. markets in the first half of the year, according to MPF Research. That's almost twice the units added in all of 2009 and the most since the firm began tracking the data in 1992. The vacancy rate declined to 6.6 percent in June from 8.2 percent in December. "Overall demand is pretty stunningly strong in the first half," says Greg Willett, a vice-president at the Carrollton (Tex.) firm.
The economy's recovery from the worst recession since the 1930s hasn't been strong enough to prevent home foreclosures, which can lead dispossessed homeowners to seek rentals. Yet it has created some new jobs. Employers began hiring again in January, adding an average of 147,000 jobs a month through June, according to the Labor Dept. Employment for people 20 to 29 years old—a key group for landlords—rose in May and June over the same months in the previous year for the first time since the end of 2007.
That may be enough to have persuaded some people sharing housing with relatives to get their own places, says Mark M. Zandi, chief economist of Moody's Analytics (MCO). "Given how hard it is for families to live together for very long, they moved out as soon as they got a job or even thought they could find one," he says.
Mike Odenthal moved to the New York area in January from San Diego in search of a communications job, sleeping on his younger brother's couch in Jersey City, N.J. He moved out four months later after his brother put the condominium up for sale, eager to live on his own. "I was tired of depending on my family for housing," says Odenthal, 27, who also stayed with his parents in Jersey City. He found a roommate and moved July 1 to Manhattan's Upper East Side, paying $700 a month for his share of the rent. The next morning he got an offer to work at a public-relations firm.
Thanks to Odenthal and people like him, apartment owners have been able to raise rents. Effective rents, or what tenants pay after concessions from landlords, increased 1.4 percent in the biggest markets in the first half of the year, according to MPF Research. Rents may rise 4 percent to 6 percent in 2011 and 2012, Willett says, compared with about 2 percent this year. Landlords won't be able to jack up rents too aggressively, he adds, because unemployment remains high at 9.5 percent and declines in home prices have made it no more expensive to buy than to rent in about half of larger markets around the nation.
Riverstone Residential Group of Dallas, which manages 175,000 units in 30 markets around the country, has reduced average concessions to about a half-month's rent from about two months' a year ago. CEO Walt Smith says he expects rents to go up significantly by 2012 as the apartment supply tightens because so few new units are being built. "Landlords are cautiously testing the strength of the submarket their property is in to see if [it] will withstand small rent increases," Smith says. "In most markets, they've been successful."
The Bottom Line: Improving job prospects for young people are encouraging them to move out on their own, a boon for apartment landlords.