So, the rental market is getting a bit better. But (predictably), condos are getting in the way.

I just signed my tenants into another one-year lease, so I don’t have firsthand knowledge of what the rental market is like at this moment, but I’m reading that although rents have inched a bit higher in the past year, the vacancy rate is at a two year high (6.1% nationally). How would this happen? Although renting is looking more attractive to people, there are a lot of people who bought (primarily condos) speculatively, hoping to do a buy-and-hold strategy and make some easy money. Unfortunately, the housing market didn’t do what they predicted (went down, or at best flat instead of skyrocketing), and they’re left either selling at a loss, or renting. This is adding more stock to the rental market, and driving vacancies up (and preventing rents from increasing enough to keep up with rising inflation, property taxes, insurance costs, etc.)

I’m somewhat of a chicken as far as raising my rent. If I’m looking for new people, I usually do some research on craig’s list as to what comparable 2 and 3 bedroom apartments in my neighborhood are going for, and price it somewhere between the going rate for a 2 and 3 (it’s basically a 2+. could be a three bedroom, but nobody wants that 9×7 room with a chimney running through it as their bedroom). I tend to price things conservatively, because I don’t want to take a chance of it getting to be a week and a half before it goes vacant and still have no renters. Next time, I’d like to start out asking a little higher, and see what I can get.

Anyway, here’s a bit of what I’ve been reading on this topic; this is from The Herald Tribune, “U.S. rental market set to slow down amid housing glut”

“Competition already is forcing the big apartment owners to offer concessions like two months free rent,” McCabe said.

Vacancy rates for rental apartments rose to 6.1 percent in the United States during the first quarter, the highest level in almost two years, even as the average monthly rent reached a record $991, said Sam Chandan, chief economist the New York real estate research company Reis. New York had the lowest vacancy rate in the first quarter, he said.

Nationwide, 2.8 percent of houses for sale were unoccupied in the first quarter, the highest level since the Census Bureau started collecting the data in 1956. Unsold properties on the market totaled a record 3.45 million in 2006, according to the National Association of Realtors.

“Unsold properties being turned into rental units are creating a shadow market that’s driving up the vacancy rate and slowing the growth of rents,” Chandan said. “Areas that saw the most speculative investing, particularly in condos, will see the biggest pressure on rents.”

Anthony De Silva said he was not happy that he had become a landlord. He bought a two-bedroom condominium 18 months ago on the ocean in Hollywood, Florida, expecting to sell at a $100,000 profit. Instead, he is now looking for tenants at $1,700 a month.

“I don’t want to sell for less than I paid, so my only choice is to rent it,” said De Silva, a New Yorker who made $80,000 in November 2005 by flipping, or selling quickly, his first Florida real estate investment, a condominium in Fort Lauderdale. At the time, prices had climbed 29 percent from a year earlier, the peak of the market in that area.

The increase in competition from landlords like De Silva is spurring apartment owners to offer enticements. Lincoln Green Apartments, a Philadelphia complex that rents units from $840 to $1,370 a month, is offering two months free rent for people who sign a one-year lease.

“Increasing vacancies does not bode well for rental incomes,” said Nabil El-Hage, a professor at Harvard Business School. “We’ve seen a softening in apartment REITs as a result.”

A Bloomberg index of 19 apartment-focused U.S. real estate investment trusts, or REITs, has fallen 14 percent over the past three months.

[read the full article here]

National Association of Residential Real Estate Investment Advisors, “Brokers: As Home Buying Gives Way to Renting, Rent Hikes Curiously Tame”

Weak new home sales and the subprime mortgage blowout have reinvigorated a once-soft rental market – yet rent increases remain tame nationally, including in areas hit hardest by the housing slump, brokers and landlords say.

Every foreclosure and every new loan restriction adds to the army of renters – and developers and investors have been slow to feed their hunger.

Even so, rent increases appear fairly muted, up perhaps 3% to 5% nationally – with any real measurement complicated by the sharp falloff in concessions that were used to shore up a hemorrhaging tenant base during the five-year housing boom.

Nevertheless, landlords complain the rent increases they’re getting pale against galloping increases for insurance, utilities and property taxes.

There are cogent arguments suggesting rents should rise in some dramatic fashion going forward. There’s the growing population of renters and the shrunken supply of apartments that were lost to condo conversions. There are those pesky operating costs. But it may all come down to the speculators who can no longer justify renting at a loss in a depreciating housing market.

Arguing against big rent increases is the traditional parsimony of renters, many of whom are former homeowners who painfully discovered they were not as deep-pocketed as they were led to believe.

“You can’t draw a single conclusion about the rental market. It’s individual to cities and to each building. It’s not a broad brush situation. All my properties are a little different,” said Joy Anzalone, senior executive vice president for CMI Consolidated Management Inc., serving Cleveland, Detroit and Florida.

“In Florida, one year ago you could raise rents every singe week because supply had dried up from all those condo conversions,” she said. “If the property was on the water or on a golf course, absolutely it was slated for condo conversion.”

[read the full article here]

I know its easy to say now, but I remember predicting this very thing. I hope that it only takes a few years to correct itself, and enough people eventually buy the condos (perhaps at a lower price) that the rental market can correct itself. The general “renting is smarter than buying” mentality that’s showing up, however, good for landlords, and hopefully will stick around for a while.

Related Articles:

One thought on “So, the rental market is getting a bit better. But (predictably), condos are getting in the way.

Leave a Reply

Your email address will not be published. Required fields are marked *