Where to Rent Cheap

Some rents in major metropolitan areas rose more than 10% this year, but apartments in the Midwest and South remain easy on the pocket

You wouldn't want to be a landlord in Oklahoma City right now.

The most expensive apartments in the Oklahoma City area rent for an average of $8.68 per square foot a year—or $723 a month for a 1,000-square-foot residence—the lowest rate of any metropolitan area with a population of 1 million or more.

Compare that with New York, where a comparable apartment costs more than $4,000 per month, and the Great Plains of Oklahoma start to look pretty golden from a renter's point of view. Tornadoes notwithstanding.

"It's affordable both ways, for people who want to rent and people who want to buy," says Frank Mazella, broker and owner of Pointe Property Management in Oklahoma City. Mazella, a Bay Area native, began investing in Oklahoma's capital 18 years ago, when foreclosures became routine in the city due to its dependence on the slumping oil industry.

"I got out a map, figured out where Oklahoma was and went down there," Mazella jokes. He now shows apartments—including brand new, 1,500-square-foot apartments for $800 a month—mainly to hourly workers, the military, and college students. "Most people are just looking for housing, not luxury," he notes.

Rental Bubble

In other words, Oklahoma City, despite its relative affordability and emerging downtown scene, is unlikely to become a hot spot for relocating New Yorkers and San Franciscans any time soon. With rents rising radically across the U.S., native residents of Oklahoma City, who make a median of $22,924 annually, are probably just fine with that.

Rental rates for high-end apartments in major metropolitan areas were up an average of 6.3% in 2006, according to Global Real Analytics, a San Francisco-based real estate research firm that helped BusinessWeek.com compile its list of the biggest metropolitan areas with the lowest rent. In the New Orleans area, rates rose 27.2%, the largest increase in 2006. In San Francisco and New York, rates climbed 10.5% and 8.6%, respectively.

"The past year has been very healthy for apartments, from a landlord's perspective," says Global Real Analytics' Paul Wildes. "Prices of homes are out of reach for most people, and that's good news for apartments."

In general, price trends in the apartment sector are inversely related to those in the housing market. When home prices increase, as they did between 2001 and 2005, rental rates decrease. After the price runup, which made homeownership unaffordable to many, renting became a better option and rates skyrocketed.

At the same time, the economy has improved and the employment rate has increased, resulting in more people with jobs looking for apartments. In addition, the condominium conversion craze of the housing boom reduced the supply of available apartments, sending rates skyward. Immigration, increased mobility in the labor market, a higher divorce rate, and aging baby boomers complete the perfect formula for high apartment demand.

Of course, most of the rent appreciation over the past year has occurred in highly desirable locations and immigration hubs, such as the Northeast, Florida, and California. Eight of the 20 major metropolitan areas with the lowest rent are in the Midwest, which has seen the lowest growth of any U.S. region. Cleveland saw just a 2.9% increase in apartment rental rates last year, and Detroit saw a negligible 0.6% increase.

City on the Edge

Not all metros with low rent are immune to the current wave of rate appreciation. Austin, Tex., barely making the cheapest rent list at No. 20, saw rates climb 8.1% last year as hip San Franciscans and New Yorkers flocked to the "Live Music Capital of the World" (the city's official slogan).

"People are moving here left and right, so it's keeping us busy," says Tony Brown, an apartment broker at agency Austin Downtown Living. A 1,000-square-foot, high-end apartment in the Austin area rents for an average of $924 a month, but one-bedroom apartments just a few minutes from downtown can go for as low as $545.

Unlike, say, Birmingham, Ala., Austin—home to the University of Texas' main campus and the site of major technology corporations like Dell (DELL), Apple Computer (AAPL), and Sun Microsystems (SUNW)—has a strong job market and a trendy downtown with restaurants, theaters, and more music venues per capita than any other U.S. city. Add cheap housing to its list of attributes and it's no wonder so many are flocking to the area.

Cooler Future?

Natives of Austin, however, are less fond of their city's newfound popularity. "The high demand is good for us [brokers], but Austinites are forced to pay higher rent," says Brown, who has luxury lofts in downtown that rent for as much as $1,700 a month for a one bedroom.

Rents in Austin will probably keep rising in 2007, bumping the city out of the top 20 cheapest, but other cities could catch a break this year. As the housing market adjusts and homes become more affordable, rent appreciation should eventually slow.

According to the National Association of Realtors, U.S. multifamily housing should see vacancy rates average 5.4% in the fourth quarter of 2007, which would be unchanged from a year earlier. The rise in average rent is expected to moderate to 3.9% next year from an increase of 4.3% in 2006.

"We think apartments are now comparable to other sectors and the relative outperformance will not likely continue," says Richard Wollack, chief executive officer of Global Real Analytics. "They should generally track other sectors going forward."

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