Rents Rise As Apartments See Demand

Investor's Business Daily

Seizing upon growing demand and a dearth of new construction, apartment landlords nationwide have boosted rents over the last two years and expect to keep raising them for the foreseeable future.

The improving fundamentals have placed multifamily properties well ahead in occupancy and rent growth vs. other commercial real estate sectors, which in many cases are experiencing anemic growth.

With the renter-age population plentiful and many strapped homeowners turned into tenants, monthly apartment asking rents rose 2.2% year over year in the first quarter to an average $1,070, says property research firm Reis. The average vacancy rate of 4.9% marked a year-over-year drop of 130 basis points.

Developers, cautious in a slow commercial real estate recovery, finished just 7,342 apartments in the first quarter, the least since 1999, Reis says. In the last year, debt financing has become more available for acquisition and development in big cities, but lending is still constrained in smaller markets, the National Multi Housing Council noted in an April apartment trends report.

Winning The Space RaceOffice building and shopping center owners, by comparison, are grappling with weaker rent growth and more empty space. Reis pegged the average vacancy rate for office properties at 17% and for retail centers 11% in the first quarter.

"I'm optimistic about the multifamily sector, certainly for the next two years," said Kevin Thorpe, chief economist at commercial property brokerage Cassidy Turley. "We've entered a period of sustained rent growth.

A recent Cassidy Turley report said that in 2011 apartment rents rose in all 50 markets that it surveys.

But how long can apartment landlords continue to hike rents? A tepid economic recovery has generated underwhelming job creation with annualized GDP growth under 2% in four of the last five quarters. With jobs and consumer housing budgets tight, landlords' pricing power faces head winds.

Reis notes that multifamily rental growth has failed to match the increases that the sector recorded in months leading up to the recession.

Competition from single-family homes looms, too. States' $25 billion settlement with five of the biggest lenders over foreclosure irregularities should result in more foreclosures in coming months, which could keep a lid on home prices. Before the settlement, banks stalled foreclosure proceedings to avoid litigation. Meanwhile, the federal government is encouraging investors to buy bank-owned homes in bulk and rent them out, presenting more competition for the apartment industry.

The potential challenges fail to worry multifamily observers, who point to the lack of new supply and maintain that demand continues to swell among various groups. Those include the "echo" boom generation — people born in 1986 or later who are entering their prime rental years — and more than 3 million former homeowners displaced by foreclosures or short sales.

The homeownership rate fell to 65.4% in the first quarter, from 66% a quarter earlier. It's the lowest in 15 years, the Census Bureau says.

"You're going to see far more multifamily success stories even if there's a rise in foreclosures and investors buy them up to rent them out," Thorpe said. "Demand fundamentals trump all.

Still, an apartment owner's ability to successfully raise rents in large part depends on a property's quality and location. Higher-class units in urban areas with better-than-average job creation are positioned to perform best, Cassidy Turley says.

In some cases, aggressive apartment owners have seen tenant turnover tick up as a result of rent hikes, but they've been able to quickly fill the space to maintain occupancy. Take Houston-based Camden Property Trust (CPT - News), which owns 67,000 units in major and secondary markets across the U.S. The real estate investment trust mainly owns and develops high-quality midrise apartment buildings with pools, clubhouses and other such amenities. A typical 971-square-foot Camden unit rents for an average of $1,005 a month.

In the first quarter Camden increased rents by 5.4% from a year earlier, and the annualized turnover rate rose to 48% from 42%. Yet the average income of Camden renters has risen $7,000 in the last year to more than $69,000, said Camden CEO Richard Campo on the company's first-quarter earnings call with analysts in late April. Occupancy has remained relatively stable at around 95%.

"In spite of rising rental costs for our customers, their ability to pay higher rents has been consistently improving," Campo said.

Tenant demand for single-family house rentals is on the rise, too, according to research by property data tracker CoreLogic.

The company, which is launching a service to give bulk foreclosure investors data such as rental rates and property values, has been analyzing the single-family rental market through multiple listing services in 26 cities across the country. Currently there's a four-month supply of single-family homes available for rent, down from more than five months a year ago, said Mark Fleming, CoreLogic's chief economist. Single-Family ProfitsThough rents for single-family homes have flattened the past couple years, for investors the real profit potential is based on the fact that bank-owned homes are selling for 30% below market value, he said.

In January, single-family rentals sported capitalization rates of about 8.6% on average, vs. 5% in early 2006, CoreLogic found. Cap rate is a measure of annual yield tied to the income that property can produce.

If institutional investors buying homes in bulk can command even greater discounts, those yields should rise, Fleming said. Then the ability to raise rents would depend on where the house is located.

"Rental pricing power is purely a function of market dynamics," he said. "Once a landlord owns 500 properties, what's the difference between them and any other landlord in their ability to raise rents?"

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