Market News
May 13th, 2004

May 13 / 9:17 EDT

Reality Check: US Rental Market Weak But Brokers More Hopeful

By Gary Rosenberger

    NEW YORK, May 13 (MktNews) - The nation's rental market remains depressed, stifled by low mortgage rates that have triggered a frenzy of home buying, but hopes are emerging that a rebound will occur when higher rates take some of the luster out of homeownership, brokers say.

There are pockets of strength, most notably southern California, where the housing market is so tight that it leaves many tenants with no choice but to rent -- but even there landlords are loath to raise rents, local brokers say.

In the New York Metro area, job growth on Wall Street and a desire by homeowners to cash out at peaks have created a small army of temporary renters and engendered a mild revival, one broker says.

Elsewhere, any uplift is tied to the willingness of landlords to lower rents or throw in strong enticements as they struggle to fill vacancies.

"It's still a renter's market. There is still more inventory than there are people to move into it -- but we're starting to see it change," said Richard Oceguera, director of business development at Rent-Direct.com, an Internet-based apartment search firm covering the New York Metro area. "We've recently seen an increase in the number of people looking to rent."

Oceguera believes some of the demand comes from former homeowners who sold at peaks and are biding their time until they invest in their next home. "They sold their co-ops and are becoming renters by default," he said.

He also sees Wall Street job growth fueling the rental market. In the "normal" rental market, which Oceguera defines as $1,200 to $3,500 a month, "we are seeing some increase from relocations. More companies are referring people to us for their employees who come from out of state," including a spate of recent MBA grads who are finding it easier to land financial services jobs.

The focus of most of their attention is Manhattan, which represents 50% of his business, and even then "there are more rental apartments available then they could ever hope to see." With new residential construction on the West Side, landlords are dealing with overcapacity issues and are forced to compete. "Over the last three years rents have steadily decreased," Oceguera said.

Rents are starting to rebound in some neighborhoods, but "they remain well below market rates from three years ago," Oceguera noted. Asking rents are down anywhere from $20 and $200 a month from a year ago.

New York City landlords are willing to negotiate. "They'd rather drop rents than have the apartment sit," he said. His own website shows landlords offering anywhere from one to three months free rent in neighborhoods like Chelsea and Hell's Kitchen. "Some offer free health club memberships, and you're seeing more and more buildings accepting pets."

Oceguera believes interest rates would have to rise substantially before his outlook improves, with steady rate increases likely exacerbating the urgency to buy a home in the near term.

"Activity for the last three months is much better," said Joy Anzalone, chief operating officer at Consolidated Management, Inc. in Cleveland, with apartment properties in Ohio, Michigan and Florida.

She attributes the upsurge to a more aggressive marketing stance, including ratcheting up incentive programs to make renting more enticing. "We discovered that our biggest expense came from the reduction in revenues because of high vacancies," she said.

Anzalone is encouraged. "Market conditions are more positive, and we haven't seen that in three years. Renters are more qualified," she said. "We have been more aggressive with incentives, but the market has responded as well. Last year the market didn't respond."

The plan going forward is to fill vacancies at low prices if need be, then hope market conditions allow for rent increases, Anzalone said.

But as discounts proliferate, landlords are caught in a bind. "This winter was a bad one in Ohio and Michigan and our utility costs were incredibly high," she said. And though insurance costs have leveled off, they didn't decline and thus the galloping increases of past years linger.

The market remains bleak in Tucson, said Gary Sax, co-owner of Apartment Locators, a search firm. "It's not positive. There's continued pain. We are seeing better occupancy but with huge concessions," he said. "The way I look at it is that effective occupancy, where you actually pay rent for that month, is as low as it's ever been. Occupancy is being bought at a terrible price."

The other dampener is that tenants are fixated on low prices. "They won't pay for quality. They buy on price, not amenities," he said.

Landlords can hardly compete with home sellers in the local market. "If you can buy a three-bedroom tract home for $850 a month and no money down, why would you want to spend $1,100 to rent?"

But Sax suspects many homeowners are being set up for punishing times when interest rates rise. "There are a lot of unsophisticated people who have highly sophisticated mortgage instruments. When these rates adjust I foresee record foreclosures," he said.

There is a bright spot in the snowbird business, which this winter was up 26%. "That has come back fairly dramatically. People seem less nervous about traveling and about their retirement plans dwindling to nothing," Sax observed.

In California, a super-tight housing market leaves people no choice but to rent, while in Nevada a plentiful supply of new housing means rental properties are still lagging, said Steve Bergstrom, regional vice president for Greystar Management Services in San Diego.

In southern California, only 15% of the population qualifies for a single-family home. The rest are renters, and that market is tight. As a consequence rents have been up for the past year, albeit at a slow rate of growth, he said.

Nevada is in flux. Rents there have been depressed, but Bergstrom feels that with a rise in rates and a continuing influx into the state, the rental market is poised to step in when home buying falters. "We predict dramatic rent growth (in rents) in the next three years."

Northern California is also showing signs of rebound as Silicon Valley and surrounding areas begin to undergo a recovery.

"I'm very optimistic about the next two to four years. The outlook is bright in every one of our markets," Bergstrom said.

Mark Verge of WestsideRentals.com, serving the Los Angeles area, described an uptick in activity. "I see more renters in the market. More people are cashing out on homes and renting. The rental market is solid. Anything that's listed below market rates gets snapped up immediately."

But rents are not rising - "they're just solid," he said. Indeed, he said he feels sorry for people who bought homes with the thought of getting investment income. "They call me and say the real-estate agent told them they could rent it for $2,200. I ask them how that's possible when the apartment next door to it rents for $1,100."

Ellen Burnstein, vice president for Dale Henson Associates in Atlanta, said the local market still suffers from lack of job growth."It's not a pretty picture - it's just kind of flat," Burnstein said.

According to the company's year-end outlook, effective rents were down by 2% from the end of '02, even as occupancy rose by around half a basis point. Because of the focus on owning, rental properties are being converted to condominiums, including two buildings she knows of that were supposed to have opened up as rentals.

Burnstein expects the market to improve, with housing starts having slowed locally and the overall economy on an uptick. "Things will pick up. They probably have started to turn around already, but it takes a while to work it's way through," she said.

Meanwhile, Atlanta landlords are taking no chances, offering two or three months free rent. She measures the value of concessions at $107 a month at the end of 2003, up from $98 a month the year prior.

In Boston, the market is still in the doldrums, said Matthew Newman, publisher of Just Rentals and himself a landlord and owner of an on-line rental service. "We haven't seen a turnaround yet. There's still weakness."

Newman sees rents continuing to come down, although not as fast as in the past. Despite talk of higher rates to come, "it's hard to say when the turnaround will come," Newman said.

The U.S. Labor Department is scheduled to release April's consumer price index on Friday at 8:30 a.m. EDT. CPI rose by 0.5% in March.

    Editor's Note: Reality Check stories survey sentiment among business people and their trade associations. They are intended to complement and anticipate economic data and to provide a sounding into specific sectors of the U.S. economy.