Lifestyle

The Housing Bust Shakes Up Rentals


In most housing downturns, rental markets thrive. This time, a glut of properties has put the brakes on rent hikes in many cities

For many Americans, as property values sink and mortgage interest payments rise, the dream of homeownership has turned into a nightmare. In the past, however, one group of people who have tended to ride out real estate downturns are landlords, who can raise rents while potential buyers sit on the sidelines waiting for conditions to settle. But not this year. Rent growth in 2007 actually went flat in some metro areas hardest hit by the housing meltdown.

"What we will see is more of a return to where we were before the huge boom in homeownership," says Rob Massey, vice-president of industry development for Rentals.com. "In cases where you don't see the rental market rebounding, it's because of an oversupply of properties."

Saturated Metro Markets

It's no surprise that rents are rocketing up in healthy urban job centers with limited room for new apartment construction such as San Francisco, San Jose, New York City, Seattle, and the District of Columbia. But other metro areas with slow job growth such as Denver, Boston, Dayton, Memphis, and Detroit experienced a continuing trend of weak rental growth, according to a ranking of effective rent increases in 2007 for large metro areas compiled for BusinessWeek.com by Manhattan-based real estate research firm Reis (REIS).

In many Florida metro areas, vacancies increased last year, and rents, following significant increases in 2005 and 2006, leveled off. That's good news for people who might have lost their homes in a foreclosure; there are plenty of places for them to rent. The state, which has one of the highest foreclosure rates in the nation, is also dealing with a ballooning inventory of rental properties. Investors who found they couldn't unload their condos after the housing bubble collapsed instead began scrambling to find tenants and started undercutting traditional apartment complex owners to fill units. Some landlords began offering one or two months of free rent to convince tenants to sign leases, says Robert Smith, president of Smith Equities Real Estate Investment Advisors in Orlando, Fla.

"It's all negotiable," Smith says. "A lot of people out there are trying to get your lease."

Condo Conversions Revert to Rentals

Many rental homes were taken off the market during the housing boom when they were converted into more profitable condos. Investors paid a premium of up to 50% to buy apartment buildings because they expected to make a big profit by selling them as condos, Smith says. When the housing market collapsed, investors who had started conversions tried to lure tenants back or simply were forced into foreclosure, he says.

"There's just more supply out there available for people to rent," says Avery Klann, senior vice-president for Apartment Realty Advisers in Boca Raton, Fla. "Over time those houses will be sold, and you'll start to see very strong rent growth in apartment communities as well."

Phoenix and Las Vegas, two other slumping real estate markets with a heavy concentration of investment properties, have been relatively flat for the past couple years. Rent growth in Miami also slowed in 2007 despite relatively tight apartment vacancies. The vacancy rate in Miami was 4% last year, and the average effective rent increased 2%, to $1,063, according to Reis.

Coastal Cities Command a Premium

Miami has stronger job growth than other South Florida communities and a larger proportion of new luxury condos, which don't compete with average apartment rentals, says Hessam Nadji, head of research for Marcus & Millichap Real Estate Investment Services.

In other coastal cities where the job market, housing market, and population growth have been robust, rent increases have accelerated. San Francisco was the top-ranked metro area for rent hikes last year. The effective rents jumped 10.3%, to $1,764, in 2007, compared with a 7.7% increase in 2006 and a 3.8% increase in 2005.

Art Swanson, chief operating officer for Lightner Property Group, which manages more than 300 apartments in San Francisco, says tenants in rent control apartments are unlikely to move out, so "a lot of people coming from out of town are paying the higher prices." Swanson says there's heavy demand for entry-level apartments, particularly studios, which are commanding higher rents.

"People are looking to take less to spend less," Swanson says. "They're being more budget-conscious."

Sam Chandan, chief economist for Reis, says he expects rents throughout the nation to begin moderating. "When people's pay is growing more slowly—like during an economic slowdown—renters become more price-sensitive," Chandan says. "Rent gains will remain healthy and stable, but it's unlikely that they will accelerate significantly."

Check out the BusinessWeek.com slide show to find out which cities saw the highest and lowest apartment rent hikes in 2007.

Gopal writes about real estate for BusinessWeek.com in New York .

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