Renting — Not as Cheap as Once Thought
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Again Proving the Relationship Between Supply and Demand
The New Costs of Renting- smartmoney.com
As more people pursue being a renter than a homeowner, the supply and demand ramifications are translating to escalating rents and other fees in an improving multifamily economic landscape. A Smart Money article references REIS, Inc., a real estate data firm, reporting a 17 percent decline last year in residential vacancies to 6.6 percent and a corresponding increase in rents of 6 percent (pre-recession average of $930 per month for studios, one and two bedroom units, to $986 today). That’s pretty significant inflation and soon to be a blog column.
Some markets, according to REIS, have seen substantial rent increases with San Jose marking an 8 percent jump since pre-recession (2007) while New York rents rose almost double digits at 9 percent. And more increases are in the pipeline with a forecast gain of 3.4 percent in 2011. And that’s for cash rent. Effective rents, which are the net rents received by landlords after concessions (which are spread over the life of the lease), are going up even more. In soft markets, landlords have been known in the past to give one to several months free rent, free storage, DVRs (and I recall in Texas back in the 1980s even free hunting rifles for a 12-month lease). As vacancy rates decline renters will see fewer and fewer concessions from property owners.
Marcus and Millichap’s 2011 National Market Report (free but you must register to access), reports that net absorption of apartments in 2010 was double the number constructed. This report includes a forecast on more than 40 major markets nationwide.
Marcus and Millichap’s multifamily forecast for 2011 includes:
• Further reduction of vacancy rate by 110 basis points to 5.8 percent (matching the 2010 reduction)
• Asking rents will increase 3.5 percent
• Effective rents will rise 4.5 percent
• Cap rates will decline even further in 2011 to 7.2 percent (national average)
• New Units available for rent will be down 46 percent from 2010
In San Jose, for example, M&M is forecasting that 2011 will see a reduction in vacancy rates to 3.4 percent with a corresponding increase in asking and effective rents of 4.2 percent and 4.9 percent, respectively. In comparison, however, DataQuick’s analysis of home sales (from all sources) in Santa Clara County, California (which includes San Jose) shows that median home prices have fallen from a peak of $713,500 in May 2007 to $460,000 at the end of 2010 (a drop of 35.5 percent.)
The pipeline of new product is vividly illustrated in the graph below showing the total number of new multi-family building permits issued since 1980. Last year saw the fewest multi-family permits issued in the prior 30 years. And that translates into the fewest number of new units coming onto the market in 2011.
Once again I have to invoke the TINSTAANREM clause—There Is No Such Thing As A National Real Estate Market. In San Jose, for example, Marcus & Millichap is forecasting that 2011 will see a reduction in vacancy rates to 3.4 percent with a corresponding increase in asking and effective rents of 4.2 percent and 4.9 percent, respectively. In comparison, however, DataQuick’s analysis of home sales (from all sources) in Santa Clara County, California (which includes San Jose) shows that median home prices have fallen from a peak of $713,500 in May 2007 to $460,000 at the end of 2010 (a drop of 35.5 percent). Yet the above referenced Marcus & Millichap report shows that prices per apartment unit in San Jose have declined from the mid $160,000s in 2007 to the $150,000s today—a drop of less than 9 percent.
The bottom line is that as the U.S. continues to shed homeownership rates, rental rate increases will continue to outpace home price value changes. Renters—your monthly costs will continue to rise in most U.S. markets. And for those that purchased multi-family properties in the past 24 months – congratulations for your insight into an ever improving market.