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Wednesday, April 7, 2010

Apartment Rents Rise as Sector Stabilizes

The Wall Street Journal

Apartment rents rose during the first quarter, ending five straight quarters of declines and signaling the worst may be over for the hard-hit sector.

Nationally, the apartment vacancy rate stayed flat at 8%, the highest level since Reis Inc., a New York research firm, began its tally in 1980. Local markets, such as Houston apartments, generally followed the national lead, although there were exceptions.

Reis tracks vacancies and rents in the top 79 U.S. markets, and rents rose in 60 of them, led by Miami, Seattle and New York—all cities that have notched big rental declines in the past year.

Rents increased 1.6% in the first quarter in Miami and 0.9% in New York. The gains came during what is usually a seasonally weak period for apartments and suggested that landlords may have some momentum heading into the peak spring and summer leasing season.

"Deterioration seems not to have just been arrested but reversed," said Victor Calanog, director of research for Reis. "Several markets have bottomed and may be on track to recovery," he said.

Nationally, effective rents, which include concessions such as one month of free rent, rose 0.3% during the quarter compared with a 0.7% decline in the fourth quarter of last year and a 1.1% drop in the first quarter of 2009. Vacancies are tied to unemployment, because many would-be renters move in with family members or double up during a downturn.

"We clearly hit an inflection point in all of our markets in January and February," said Jeffrey Friedman, chief executive of Associated Estates Realty Corp., which owns and operates 12,000 units in the eastern U.S.

Renters are also staying put longer: the average renter now stays for 19 months, up from an average of 14 months, said Mr. Friedman, and despite low mortgage rates and greater home affordability, fewer renters are leaving to buy homes.

"This is the first time in many, many years that it feels like even people who could afford to buy are making the investment decision not to," Mr. Friedman said.

Difficulty in obtaining financing for new construction of Dallas apartments, meanwhile, has limited the supply of new units that will be added in the coming years. Those fundamentals have landlords and investors excited about the potential for rents to pop once the economy gathers steam.

Still, Mr. Calanog said that a "slow recovery" was likely and that landlords shouldn't expect "galloping rental growth" until the job market firms up, particularly because younger workers that are more likely to rent have borne the brunt of job losses.

Others warned that gains were fragile and that landlords could continue to offer concessions to fill units.

"Rent reductions are not over yet," said Hessam Nadji, managing director at real-estate firm Marcus & Millichap. He said he didn't expect to see sustained rental growth until the second half of the year.

Barely half of the 22,000 units in buildings that opened their doors last quarter were filled, and landlords may cut deals because they face deadlines to pay back construction loans. "That's where renters are going to find deals," Mr. Calanog said.

Portland, Ore., posted the largest rent decline, at 0.7%, followed by Las Vegas, San Diego, and Southern California's Inland Empire. Those three markets have all seen an uptick in home-buying activity, particularly among the low end from first-time buyers and investors.

South Florida, meanwhile, appears to show signs of stabilizing after a painful years-long slump prompted by heavy overbuilding. Rents gained 1.1% last quarter in Palm Beach and 0.8% in Tampa-St. Petersburg.

"That market has been so bad for so long that many people had started to forget about it," said Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP.

Biggest Annual Rent Gains

Rank Metro Market 12-month Effective Rent Growth
1Colorado Springs2.5%
2District of Columbia2.0%
3San Antonio apartments1.5%
5Little Rock1.3%
8Suburban Maryland1.0%