It's Now a Renter's Market

BusinessWeek

Across the U.S., desperate landlords are coming up with novel ways to attract new tenants and retain old ones

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Amy Gips loves her one-bedroom apartment in a swank Manhattan building that features a gym, golf simulator, yoga studio, and massage rooms. But she no longer feels she can justify paying $4,400 a month in rent, especially now that her ex-boyfriend has moved out.

A week ago, just as the 27-year-old associate at a private equity fund was planning her next move, a letter arrived from the property management company. The rent for the 750-square-foot Chelsea apartment with floor-to-ceiling windows overlooking Madison Square Park was reduced $900, or about 20%. It changed her calculus, though she hasn't given up on the idea of shopping around for something under $3,000 a month, with one or two months of free rent thrown in.

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For years, rising rents in Manhattan were thought to be as inevitable as baseball at Yankee Stadium. But times change, and in New York, landlords are scrambling to hold on to renters who have been hit by the economic downturn.

That means renters who, like Gips, are still in good financial shape now have the whiphand. "I was thinking that the rent was so high that there was no way I'd consider staying," says Gips. "Now that they've offered the reduction on their own, I kind of feel I should do a bit of negotiation."

Avoiding Empty Apartments

During the six months since the financial crisis began in earnest, control of the Manhattan rental market has switched to the tenants, who no longer have to pay broker fees (traditionally about 15%) and who can get up to three free months of rent and even gym memberships thrown in just for signing on the dotted line. The power shift might not be as dramatic in other parts of the country, but rents are getting more affordable from Charlotte to San Francisco. And landlords everywhere are getting more creative (and desperate) to hold down vacancies and prevent turnover.

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Landlords figure it's better to take a hit by offering a month or two of free rent and other freebies than to carry empty apartments that aren't generating income.

It's a nationwide phenomenon, according to Victor Calanog, research director at real estate data firm Reis. Half of apartment buildings reduced rents in the fourth quarter of last year and the first quarter of this year -- the highest percentage since Reis began tracking apartment data in 1980. (By comparison, only 17% of buildings reduced rents in 2007.) And average asking rents fell 0.6%, to $1,046, in the U.S. in the first quarter, compared with the previous quarter, the largest drop since Reis began collecting quarterly data in 1999. And average effective rents, which include free months and other landlord incentives, fell 1.1%, to $984.

Effective rents fell in 64 of 79 markets that Reis tracks. Effective rents in San Francisco dropped 2.8% in the first quarter of this year, compared with the previous quarter -- the nation's largest quarterly decline. Rents fell 2.6% in New York City (all five boroughs), 1.3% in Charlotte, 2.5% in San Jose, 0.9% in San Antonio, 0.9% in Cleveland, 1.2% in Chicago, and 2.3% on Long Island. Only a few markets, such as Houston and Dallas, showed increases, Calanog says.

Good Time for Good Deals

BusinessWeek teamed up with Reis to come up with the 25 most affordable large metro areas in terms of rents as a portion of local income. Oklahoma City, where people spent just 12% of their income on rent, was the most affordable. Other cheap markets included Indianapolis, Denver, Fort Worth, and Cleveland. The least affordable market was New York, where people spent 57% of their income on rent. But even New York is getting more affordable. About 75% of rental buildings reduced rents in the first quarter, Calanog says.

"Landlords are under increasing pressure as vacancies are moving up," says Calanog. "It's a great time to find deals, even if you're about to renew your lease. Just be prepared to follow through on any credible threats."

Paul Salamanca, chief executive of SkipBrokers.com, an online no-fee rental company for Manhattan apartments, says tenants are negotiating aggressively. "People are saying: 'If you don't help me out, I know another landlord that's willing to,'" Salamanca says.

But landlords around the country aren't reducing rents just because tenants are shopping around. Americans have seen their finances deteriorate amid the ongoing layoffs and pay cuts. Some landlords have dropped rents on a temporary basis to allow tenants time to find a new job.

For People Who Lose Their Jobs

About three weeks ago, Cleveland's Goldberg Cos., which owns 9,000 units in Ohio, North Carolina, Florida, and Texas, started offering "layoff-proof" leases, which guarantee tenants up to two months of free rent if they provide proof they were laid off. If the tenant is unable to find another job after the two months, they can break the lease with no penalty.

The company hopes to attract tenants who are living with parents or sharing apartments with multiple tenants.

"What's keeping people from renting is fear," says Eric Bell, a senior vice-president at Goldberg. "We wanted to give people a cushion or a safety net, so they know they'll have some time to get back on their feet."

Anger Among Other Tenants?

But not all landlords are giving renters financial incentives. Mary Gwyn, chief innovator for Apartment Dynamics, a property management training and consulting firm that also manages apartment communities in North Carolina, says she recommends against that strategy. She says allowing new tenants to live for free for a month or two damages profits and could create tension with existing tenants who aren't getting the same deal.

Landlords can prevent turnover by creating a better sense of community in the development, she says. They might cook Thanksgiving dinner for residents who don't have family nearby, send out cards to residents who are celebrating birthdays or who have suffered a death in the family, and organize pizza parties and useful workshops on résumé writing and job searches, she explains.

"People want to live in a neighborhood where they feel that someone knows their name and cares about their circumstances," Gwyn says.

But Robert Scaglion, senior managing director of Rose Associates, one of New York City's largest development, property management, and marketing firms, says tenants in this job climate are sensitive to rental rates. He said the company, which manages Chelsea Landmark, where Gips lives, has increased its occupancy level to 98% by making swift changes to rents to reflect the market.

Where Renters Are Going

The pool of Manhattan renters has shrunk because people are doubling and tripling up, moving in with parents, or leaving the city for less-expensive digs or for new jobs elsewhere. Many parents who were subsidizing their twentysomething child's apartment can no longer afford to do so. At the same time, renters from Brooklyn, Queens, and northern New Jersey, who never thought they could afford Manhattan, are coming in to take advantage of newly reduced rents, Scaglion says.

"Normally, when the sales market starts to soften or go down, it's very good for the rental market," Scaglion said. "This time the for-sale and rental markets have gone down simultaneously."

The good news for landlords is that fewer people are moving out of apartments to buy condos or single-family homes, since those markets have also slowed in the Northeast.

Trading Up

Sofia Kim, vice-president for research at Steeteasy.com, a popular New York real estate listings site, says Manhattan rents are falling fast. Renewing tenants aren't asking just for reductions; they're asking to be moved to larger apartments for the same rents, she says.

Streeteasy says the median effective rent for one-bedroom apartments in Manhattan fell nearly 10% in the first quarter, compared with the same period last year. The rent for two-bedroom apartments dropped 15% in the Upper East Side and 28% in the hard-hit financial district, the company says.

Gips expects New York rents to drop more. But she doesn't want them to fall too far. "I hope next year there isn't another big [rent] reduction," Gips says. "That would mean the economy is in an awful place."

Big Cities With Affordable Rents

As unemployment rises and home prices plummet, many Americans find that renting an apartment is an increasingly attractive option. But renting isn't necessarily always affordable. It all depends on where you live. Manhattan residents, for example, spend 57% of their income on rent, the highest ratio in the country. In Oklahoma City, the most affordable rental market, residents spend just 12% of their income on rent. Working with research firm Reis, we came up with a list of large metros with the most affordable rents.

Metro areas with populations of at least 1 million are ranked based on average asking rent as a share of income. The highest-ranked metros have the lowest share of income used for rent. Fourth-quarter 2008 average asking rent is a blended average for all sizes of apartments and does not include landlord discounts or other incentives. The populations, incomes, and rents are for the metropolitan statistical areas as defined by the U.S. Census Bureau. Click here for full descriptions of the individual metro areas.

1. Oklahoma City

Share of income used for rent: 12.3%
Average rent: $543
Median household income: $52,917
Population: 1.21 million

The Oklahoma City metro area, which includes the state capital, has the nation's most affordable rents. The metro area, home to Devon Energy and Chesapeake Energy, has a relatively strong economy, thanks to the oil and natural gas industries. Oklahoma City's asking rents for apartments jumped 3.8% in the fourth quarter, compared to a year earlier. The vacancy rate was 8.6% at the end of last year.

2. Indianapolis

Share of income used for rent: 15.1%
Average rent: $675
Median household income: $53,481
Population: 1.72 million

The economic picture has dimmed in Indianapolis, where the unemployment rate has risen to 8.2%. The state capital, famous for the Indianapolis 500, is home to major universities, including Indiana University-Purdue University Indianapolis and Butler University, which provide a boost to the rental market. The metro area's asking rents for apartments jumped 1.8% in the fourth quarter, compared to a year earlier.

3. Greenville-Spartanburg-Anderson, S.C.

Share of income used for rent: 16.5%
Average rent: $630
Median household income: $45,842
Population: 1.09 million

Greenville, about 100 miles west of Charlotte and 150 miles northeast of Atlanta, is located in the foothills of the Blue Ridge Mountains. It's the home of Michelin North America and the only BMW manufacturing plant in the U.S. Greenville-Spartanburg-Anderson asking rents for apartments jumped 2.1% in the fourth quarter, compared to a year earlier.

4. Houston-Baytown-Sugar Land, Tex.

Share of income used for rent: 16.8%
Average rent: $769
Median household income: $54,848
Population: 5.81 million

Houston's thriving metro area has one of the country's strongest economies, but with consumer spending and energy prices falling, the job market is slowing. Many of the world's largest oil companies have headquarters here. It is home to the U.S. headquarters of Shell Oil, BP, and ConocoPhillips. Houston also boasts many professional teams, including the Houston Astros and the Houston Rockets. Asking rents for apartments in the area jumped 4.2% in the fourth quarter, compared to a year earlier.

5. Portland-Vancouver-Beaverton, Ore.-Wash.

Share of income used for rent: 17.1%
Average rent: $825
Median household income: $57,757
Population: 2.22 million

The Portland area, which has a well-connected system of buses and bicycle lanes, is known for its beauty, environmental consciousness, and numerous micro-breweries. Portland-Vancouver-Beaverton apartment asking rents jumped 3.1% in the fourth quarter, compared to a year earlier.

6. Hartford-West Hartford-East Hartford, Conn.

Share of income used for rent: 17.6%
Average rent: $967
Median household income: $66,065
Population: $1.19 million

Hartford, the state capital, is also known as "the Insurance Capital of the World," It is home to Aetna, the Hartford, Travelers, and other insurance companies. The metro area's asking rents for apartments increased 1.9% in the fourth quarter, compared to a year earlier.

7. Salt Lake City

Share of income used for rent: 17.6%
Average rent: $752
Median household income: $51,306
Population: 1.67 million

The Salt Lake City metro area had a 5.2% unemployment rate in February, one of the nation's lowest. Utah's capital and seat of the Church of Jesus Christ of Latter-Day Saints saw asking rents for apartments rise 3.9% in the fourth quarter, compared to a year earlier.

8. San Antonio

Share of income used for rent: 17.8%
Average rent: $701
Median household income: $47,250
Population: 2.05 million

San Antonio, the second-largest city in Texas, is well-known as the site of the battle of the Alamo. These days, it is also known for its relatively strong economy. The unemployment rate was 6% in February. The metro area's asking rents for apartments increased 2.5% in the fourth quarter, compared to a year earlier.

9. St. Louis

Share of income used for rent: 17.8%
Average rent: $729
Median household income: $49,034
Population: 2.84 million

The St. Louis area, located at the confluence of the Mississippi, Missouri, and Illinois rivers, is home to the Cardinals baseball team, a well-respected art museum, and such large corporations as Enterprise Rent-A-Car and UniGroup. The metro area's asking rents for apartments increased 1.7% in the fourth quarter, compared to a year earlier.

10. Richmond, Va.

Share of income used for rent: 17.9%
Average rent: $794
Median household income: $53,279
Population: 1.23 million

Richmond, the state capital, has a diverse economy that includes food and tobacco manufacturing and biotech. It has a professional ballet and opera and a large river park system. The area's apartment asking rents increased 1.7% in the fourth quarter, compared to a year earlier.

Gopal writes about real estate for BusinessWeek in New York.

Click here to see the full list of the biggest cities with the most affordable rents.

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