Landlords Raising Rents as Demand Outpaces Supply

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.

Renter households are unwinding from two- and three-bedroom units into one-bedroom units after many tenants doubled up in 2009 to save money, says Johnsey. Also, more than 1.2 million young adults moved home with their parents from 2005 to 2010, creating "huge pent-up demand for rentals," reports John Burns Real Estate Consulting.

Job Markets Strong and Weak

Unfortunately for tenants, rents rose as demand for apartments grew—whether the local employment market improved or worsened. Where job creation draws in new employees, many often rent rather than buy in the short term, until they decide in which neighborhood they want to settle. In places with rising unemployment, renting becomes more feasible than buying, especially as it remains difficult to get a mortgage. "You have less interest in buying homes. The turnover rate for apartments has decreased," says Johnsey.

Greenville, an improving job market, is home to such employers as Michelin (MGDDF:US), General Electric (GE), and Fluor (FLR). Nonfarm employment grew by 2,300 people, to 294,900, in 2010, according to South Carolina's Employment and Workforce Dept. Metro unemployment fell to 9.8 percent last year, from 10.5 percent the year before, based on preliminary BLS estimates, and such companies as electric bus maker Proterra also announced plans to hire.

As the economy improved, rents in other Greenville properties, such as McBee Station, a high-end, 197-unit apartment, increased several times in the past year. Occupancy has been about 100 percent for a year and a half, says Courtney Sauve, assistant manager for the property, and demand isn't coming from local residents. Sauve says the vast majority of tenants came from out of state or from overseas for job opportunities.

Less fortunate renters in weak economies, such as California's Oxnard-Thousand Oaks-Ventura metro area, also paid more. The average unemployment rate rose to 10.9 percent in 2010, from 10 percent in 2009, according to estimates using preliminary BLS data, and the 2010 foreclosure rate, 3.81 percent, exceeded the U.S. average of 2.23 percent, according to data from RealtyTrac. Home sales in the metro are slow, and as the rental vacancy dropped below 5 percent, landlords increased rents about 5.8 percent in 2010.

Sharlene Oddy, property manager at the 397-unit Creekside Apartments in Simi Valley, says growing demand for rental housing has helped boost rents over the past year, though a new Archstone property nearby has added some competition.

Housing Rebound

Further rent increases are expected over the next few years, but levels cannot rise at this pace forever, especially if falling home prices eventually lure people back to buying. Robert Shiller, co-founder of the S&P/Case-Shiller Home Price Indices, says real home prices may drop another 15 percent to 25 percent.

And AXIOMetric's Johnsey adds: "If rents go up, people will try to control housing costs and keep them within budget. Some renters will say the ultimate way to control costs is to get a house."

New apartments under construction will also loosen supply and put downward pressure on rent levels, although it will be a few years before a significant number of new units enter the market. There were 116,700 multifamily housing starts last year and 108,900 in 2009, compared with 283,500 in 2008, according to U.S.Census Bureau data.

For now, the hot rental market may overshadow weak home sales, but Johnsey says rent increases, job creation, and falling listing prices for homes are precursors to a stronger sales market.

Click here to see the 25 U.S. cities with the biggest rent hikes.

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