How to survive prices Cooling home market heightens demand.

How to survive prices Cooling home market heightens demand.
By The Wall Street Journal.
Originally posted on June 29, 2006

It's no longer a renter's market.For years, rents have been flat or falling in cities nationwide — a result of the booming home-sales market, which transformed scores of renters into owners. But as the housing market cools, rentals are once again in demand, liberating landlords in many markets to raise rents at the fastest pace in years. They're also cutting back on the goodies that previously helped lure tenants, such as a free month's rent or a free DVD player.
While renters have had an easy ride for years, the current bout of rent increases could prove to be a jolt for many Americans, from seniors looking to downsize to recent grads looking for their own place. Average effective rents — or what tenants pay after taking concessions into account — are expected to rise 3 percent this year, according to Reis Inc., a real-estate research firm. Rents began picking up last year after several years of softness. As recently as 2002, rents fell 1 percent.Lee County is no exception.
For example, the average rent for a nice two-bedroom apartment in Lee County was up 13.9 percent to $1,017 in 2005. A one-bedroom rose 11 percent to $845 a month, according to PCMG, a property management company that specializes in multifamily buildings.The local rental market has been pushed up by the trend of converting existing apartments to condominiums: a total of more than 5,500 units sold to condo converters in the past two years.The pace of change varies greatly from market to market. In its survey of 69 metro areas, Reis found 60 markets with rising rents, with Florida's Fort Lauderdale, Palm Beach, Miami and Tampa-St. Petersburg and California's San Jose topping the list. It also found nine markets in which rents are flat or falling, including Buffalo, N.Y.; Charlotte, N.C.; Denver and Omaha, Neb.
Generally, rents in East and West Coast cities are expected to rise the fastest. Archstone-Smith, which owns apartment buildings in 41 cities, says it is increasing rents 8 percent to 10 percent in New York City and Southern California. And in South Florida, vacancy rates are so low that some landlords are raising rents as much as 28 percent, according to McCabe Research & Consulting. In Chicago, just five of 34 large apartment buildings offered concessions to renters in the first quarter, down from 19 a year earlier, according to Appraisal Research Counselors, a real-estate consulting firm.It's partly a supply-and-demand issue. Years of soaring house prices (and recent increases in mortgage rates) have simply priced many people out of the home-buying market. Indeed, the portion of U.S. households owning their own home slipped to 68.5 percent in the first quarter from 69.1 percent a year earlier, according to the Census Bureau.
Biagio Bonfrisco, a real-estate agent, began looking for his first home about two years ago, just before his wedding. "The market was too high, and it's still too high," says Bonfrisco. As a result, he and his wife rent the second-floor of a two-family house in Bergen County, N.J.Still, tenants might be able to find some good deals. For instance, landlords of new buildings still needing the first round of renters may be more willing to negotiate concessions. It can also be worth seeking out individual owners who are unable to sell a house or condominium and may be looking to rent at a reasonable price instead.The best season to apartment-hunt: between Thanksgiving and Christmas, when rental demand typically slows.
The higher costs for rentals come as strong job growth in recent years has boosted demand for apartments. At the same time, many apartments have been converted to condos, reducing the availability of rentals. Tenants forced out of units being converted to condos often have trouble finding another apartment with a similar rent, real-estate agents say.The squeeze comes as average vacancy rates dropped to 6 percent in the first quarter from as much as 7.4 percent at the end of 2003, according to Property & Portfolio Research Inc., giving landlords more power to boost rents than they've had since the beginning of the decade.
Camden Property Trust, a big apartment owner, says it is raising rents in all of its 22 markets. In Miami, Camden now charges an average of $1,319 a month for its apartments, up 7.4 percent from $1,228 in the first quarter of 2005. In Houston, its average rents rose $20 to $800 over this same period, the company says.Freebies are vanishing, too. United Dominion Realty Trust Inc., which operates in 17 states, says the amount it spent on free rent and other concessions fell 26 percent in the first quarter from the year-earlier period, to roughly $12 million, or about $265 for each new tenant. "Over the next 12 months, we expect that number to shrink practically to zero," says Thomas Toomey, the company's chief executive.Even with the latest price increases, renting remains a bargain compared with owning in much of the country. In Las Vegas, Los Angeles and Seattle, the monthly cost of renting the average apartment was roughly half what it would cost to own the median-priced home in the first quarter, according to an analysis prepared for The Wall Street Journal by Torto Wheaton Research, a unit of CB Richard Ellis Group Inc. The cost of owning is based on a 15 percent down payment and a 30-year fixed-rate mortgage; it doesn't include property taxes, insurance or tax deductions.
Major landlords will sometimes offer a better deal on just a handful of units. At AvalonBay Communities Inc., which owns apartments in a number of major markets, concessions have fallen 50 percent over the past year. But tenants may still get a break on certain apartment models that are moving more slowly, the company says.And even in some cities where overall rents are rising, individual investors having trouble selling condos and single-family homes are rushing to rent them instead. In Chicago, enterprising tenants can rent a luxury condo for about the same amount per month as a unit in an older apartment building. "It's harder to track those down, and you don't get the same management attention as you would in a rental building," says Ron DeVries, vice president of Appraisal Research Counselors in Chicago.
In some markets, such as South Florida, vacancy rates for large apartment buildings are down and rents are up. However, the supply of condos and homes available to rent in the region is growing as investors clamor to rent out properties they are having trouble selling. Owners of large rental buildings fear that this "shadow supply" of rental properties could eventually put a lid on rent increases in some markets where speculation has been rampant."We're having a flood of rental properties coming back into the market simply because the investors who bought with the intention of flipping them have not been able to," says Brenda F. Gerdes, broker-owner of Management Specialists Inc., a property-management firm in Port St. Lucie, where average rental rates for properties owned by individual investors have fallen about 20 percent over the past year.Real-estate agents say individual investors need to be realistic about their asking rents, even if the rent isn't enough to cover their monthly costs. Robert Fowler, owner of HomeRentalAds.com, a rental Web site, tells clients to base their asking rents on what similar properties are fetching, not the rents charged by large apartment complexes. If tenants aren't forthcoming, "don't wait too long before making adjustments," he adds.
J.P. Johnson, a shutter salesman, has been trying for the past three months to rent out a four-bedroom, 31/2-bath home in Palm Beach Gardens, that he purchased for $661,000. He recently dropped the asking rent to $3,000 from $3,300 but has yet to find a tenant. "The market has slowed down," he says. "We have had a few phone calls, but nothing solid."