This installment of the Portland Multifamily Update starts with an excellent quote from Bloomberg:
Rent increases replaced landlord giveaways as U.S. apartment vacancies dropped in the second quarter to the lowest in more than three years, bolstered by rising demand on the West Coast, according to Reis Inc. (REIS)
The apartment vacancy rate fell to 6 percent in the three months ended June 30 from 6.2 percent in the first quarter and 7.8 percent a year earlier, the New York-based property research firm said in a report today. The second-quarter rate matched the first three months of 2008 and was the lowest since 5.7 percent at the end of 2007, the year multifamily real estate prices peaked. Rents rose in all but two of the cities Reis tracks.
Please check back to the Multifamily Insider Report on Friday, July 15th for my analysis on the benefits of replacing incentives with rent increases. Remember, you don’t have to wait until Friday if you want to get started investing in Portland Multifamily Real Estate. Call Rick Bean at Rose City Commercial Real Estate: 503.577.1034, or e-mail me at: rick@rosecitycre.com.
“The ongoing recovery and tightening vacancies continue to generate greater pricing power on the part of landlords,” Ryan Severino, an economist at Reis, said in the report. “Vacancies should continue to decline while rents rise at an even faster pace than we observed in the first half.”
Demand for rental apartments in the U.S. has soared as foreclosures forced people out of their homes and prospective homebuyers found it harder to get mortgages. The home ownership rate in the U.S. fell to 66.4 percent in the first quarter, the lowest since 1998, according to the U.S. Census Bureau.
“There’s still a stigma to buying houses,” said Stan Harrelson, chief executive officer of Pinnacle, a Seattle-based company that manages more than $17 billion of apartments and other commercial properties. “Even with job growth, people aren’t ready to take that step.”
Landlords had a net increase in occupied space of about 33,000 units in the second quarter, down from 45,000 units in the first quarter, Reis said.
$997 a Month
Effective rents, or what tenants actually pay after perks such as a free month, climbed in 80 of the 82 metropolitan areas surveyed, to an average $997 a month from $974 a year earlier and $991 in the first quarter.
San Jose, California, led rent growth last quarter, followed by New York’s Westchester County and San Francisco, according to Reis.
Las Vegas, one of the cities hardest hit by the housing collapse, had an increase in effective rents for the first time since 2008, Reis said. Rents in the city were still down from a year earlier.
The national rent increases mark a reversal from early last year, when many landlords were offering gifts to attract tenants. Aspira, a 325-unit luxury apartment building in Seattle, gave away dozens of iPads and 40-inch televisions, preloaded credit cards worth $1,000 each and up to three months of free rent when it opened in January 2010. With occupancy surpassing 80 percent, such enticements are no longer needed.
Incentives ‘Gone’
“They’re gone,” said John Schwartz, director of the Northwest regional office for Keller CMS Inc., the Los Angeles- based project manager that oversaw the development of the 37- story Aspira.
San Jose, the largest city in Silicon Valley, led rent growth for both the second quarter and the 12 months through June 30, Reis said.
“San Jose is everyone’s darling and rents are through the roof, but that will plane off” as new supply comes to market in the next 12 to 18 months, said Harrelson of Pinnacle.
Seattle is still one of the best markets for potential rent growth, he said, citing increased hiring by technology companies and airplane manufacturer Boeing Co.
Shane Lynch, a software developer in Microsoft Corp. (MSFT)’s Xbox gaming division, said he plans to renew his lease, at the Neptune apartments in Seattle’s high-tech South Lake Union district, even though the rent for his one-bedroom unit is going up 11 percent to $1,300 a month.
‘Everyone’s Increasing’
“I’ve been looking around and it seems like everyone’s increasing that amount,” said Lynch, who moved to Seattle about a year ago from the Baltimore area to take the job with Microsoft. “I’m not seeing anything cheaper, and there’s also the cost of moving.”
Lynch, 26, said he plans to consider buying a house after he gets to know the city better.
“Because I’m so new to Seattle, I don’t want to be tied down to a certain neighborhood, but if rents continue to increase and get closer to mortgage prices, it will be kind of silly not to buy,” he said.
Rising rents have in turn attracted investors to multifamily properties, encouraging new developments and purchases.
“We don’t anticipate a recovery in for-sale housing until at least 2013,”Michael Schall, president and chief executive officer of Essex Property Trust Inc. (ESS), said on a May 5 conference call to discuss first-quarter earnings. The company, based in Palo Alto, California, owns and operates multifamily complexes in California and Washington state.
Supply and Demand
“Each month from December has shown significant improvement, and we are now confident that the apartment supply- and-demand equation is tipping towards housing shortage,” Schall said.
Market rents at Essex properties have increased 9.2 percent since the first quarter of 2010 and the rate of growth is accelerating, Senior Vice President Erik Alexander said on the conference call. Occupancy for the company’s apartments reached 97.1 percent by the end of April.
“We should see lower occupancies during the summer months as market rents continue to grow, more leases expire and we push rents on renewals,” Alexander said.
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