Renters may soon find themselves back behind the eight-ball.
The window is closing on apartment market conditions that recently gave renters some room to ruminate after fast rising rents hit a wall and caused occupancy rates to tumble.
There are some persistent, underlying conditions that could cause suffering for landlords and joy for renters in some markets, but generally, the apartment market will favor landlords this year as the rental housing sector resumes the upward march in rents and occupancy rates, even if at a subdued rate.
Apartment market analyst Marcus & Millichap reported this week in its 2007 National Apartment Report, by year-end, vacancy rates should improve 20 basis points to 5.1 percent (putting occupancy rate at nearly 90 percent), compared with a decline of 40 basis points in 2006. Rents should rise by 4.8 percent.
The nation's apartment market got a boost in 2005 as the high-flying owner-occupied housing market boom faded forcing shelter seekers into more affordable rentals. By 2006 rental rates were taking off.
Just as quickly, the rise in rents leveled off in late 2006 as renter-backlash to fast rising rents and condos coming to market as rentals combined to saturate the apartment market with inventory, according to reports from a variety of rental market monitors.
Since then, however, the owner-occupied housing market has remained largely flat, the economy has improved with more jobs, manageable inflation has kept the Fed's rate-rising in check, and the stock market reached new heights.
"The apartment market is well positioned to stage another strong performance in 2007. Vacancy will continue to decline, allowing owners to again raise rents and cut concessions," the report projects for the short term.
The report says, thanks to continued softness in the owner-occupied market, rental market demand has helped shake off the brief surge in inventory due to speculative properties (largely condos) put on the market as rentals.
"While the housing market slowdown will lead to the return of additional condos to the rental market, a temporary increase in competition is not expected to have a significant or prolonged effect on vacancy," the report said.
Given the number of apartments converted to condos during the boom housing years and expected growth in the renter pool developers need more than three years to replace inventory lost to conversions since 2004.
Days before Marcus & Millichap's report, the National Multihousing Council issued a release to say the subprime mortgage market meltdown also bodes well for the apartment market. The growing rates of foreclosures are forcing tens of thousands of former, often short-term home owners back into rentals.
The council suggests the national policy that puts home ownership at the center of the American Dream is flawed unless rental housing is included as viable, affordable shelter.
Likewise, the Marcus & Millichap report found "Housing affordability has plummeted in most major markets, and deteriorating credit quality will likely result in further cutbacks in riskier first-time buyer loan programs."
Marcus & Millichap's report goes on to say owner-occupied housing is so expensive, the disparity between the average rent and typical mortgage payment is at its widest point in 25 years.
"Even a moderate correction in home prices would have a minimal impact on apartment demand," the report found.
Notable comments by location included:
- The draw of a big city location helped New York climb four spots to No. 1 in the 2007 National Apartment Index (NAI) and pushed last year's leader Orange County, CA to No. 2. Below-average vacancy rates and strong rent growth in both markets will continue to be supported by low for-sale housing affordability.
- Indicating strength in a large employment sector, tech markets gained the most ground in this NAI. Seattle (No. 7) and San Francisco (No. 8) each rose eight spots to make their way into this year's top 10. Falling outside the Top 10 list, San Jose (No. 12) and Austin (No. 16) both climbed seven positions.
- Some big boom factors helped some markets retain strength. Markets that registered the greatest supply reductions due to conversions are now facing the greatest risk from the return of condos to the rental pool. However, many of the top conversion markets, including Las Vegas (No. 4), Fort Lauderdale (No. 6) and Phoenix (No. 10), also boast some of the strongest forecasts for employment and population growth.
Overall, for renters?
Along with higher rates and stiffer competition, "Concessions have declined dramatically in many markets since early 2004, leaving less room for improvement in 2007. On average, concessions are expected to fall to less than two weeks of free rent by year end, the lowest level since early 2002," the report found.
