Rental Demand -- and Prices -- Climb Back Toward Peak

rentalWhile everyone is wringing their hands over the price of gas this summer, few have noticed another budget-buster looming around the corner: rising rents.

Thanks to the recession and housing foreclosure crisis, there are 3 percent fewer homeowners in America, according to Census data. Where did those folks go? While a few moved in with friends and relatives, the bulk became renters. And as we learned in Economics 101: Prices are determined based on supply and demand.

Nobody has built more rental units, although some houses that were once owner-occupied now are leased. But the evidence is clear: Rents have ticked up as homeownership declines.

BusinessWeek reports that in 2010, rents nationwide rose an average 4.2 percent. By contrast -- and proof of what a difference a year can make in the housing market -- in 2009, landlords had to offer discounts to attract tenants, and effective rents (what tenants actually paid) fell 5.9 percent. According to AXIOMetrics, an apartment market research firm in Dallas, last year was one of the best periods for landlords over the past 15 years and may mark a turning point for what lies ahead for renters. In a nutshell, higher monthly rents.
You can already see the evidence in Manhattan, where the vacancy rate of 0.69 percent is the lowest in five years and rents are just slightly off their 2007 peak. How expensive are Manhattan rents? The average apartment cost $3,353 a month in May 2011, according to Citi Habitats. In its monthly rental market report, the residential brokerage found that rents were steadily increasing, the vacancy rate continues to fall and "conditions are fast approaching those found during the market's pre-recession peak."

"Apartment seekers need to be aware that conditions are 180 degrees from where they were last year," said Gary Malin, president of Citi Habitats. He described competition for apartments as "fierce."

But it's a story not confined to Manhattan. AXIOmetrics says that U.S. apartment rents climbed 5 percent in the 12 months ending in April. Nationally speaking, Northern California saw the highest jump in rents, according to AXIOmetrics. In San Jose, they rose 11 percent from April 2010 to April 2011. Step back a little further and the hike is even more dramatic. San Jose's rents hit bottom in December 2009 at an average of $1,573. Since then, rents have gone up 17.4 percent, or $274 per month. That's in just 16 months.

Oddly, rents used to track housing prices: When the price of homes went up, rents in the community followed suit. But since the recession started, noted AXIOmetrics' Jay Denton, just the opposite pattern is being seen: The places where home values have nosedived have seen rents spike.

And we can't just blame the recession. Natural disasters also play a role in rising rents. After Hurricane Katrina devastated New Orleans, nearby Houston saw a spike in rents of 9.2 percent. The average effective rent went from $747 in the second quarter of 2005 to $816 in the fourth quarter. Occupancy rates went from 89.7 percent to 94.3 percent over the same period.

There have been more than 3 million foreclosed homes since the start of 2008, according to RealtyTrac Inc., and at least 3 million more are expected by 2015, says Census data analyzed by Harvard's Joint Center for Housing Studies and The Associated Press. The rate of homeownership has fallen to 66.4 percent, the lowest since 1998, according to the Census Bureau. Most of those former homeowners have joined the ranks of renters.

And renters aren't moving into first homes with the same frequency they once did. AvalonBay Communities Inc., the second-largest publicly traded owner of U.S. apartments with more than 50,000 units, says that only 12 percent of its tenants moved out in the first quarter of this year to buy a home of their own -- the lowest level since they began tracking this information. And with fewer vacancies came higher rents. By the way, this suits the company just fine. It saw its first-quarter revenues increase 18 percent to $93.5 million from a year earlier -- thanks to higher rents.

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