While there appears to be an excess in rental housing presently, renters will likely find a very challenging rental market in the months ahead as vacancy rates vanish and rents rise, warns The Harvard Joint Center for Housing Studies in its latest report on America’s rental housing.
Contributing to the challenge, a dwindling number of multifamily units are being built. Typically, the development of new multifamily housing needs plenty of lead time too. Therefore, as more people opt to rent, vacancy rates will continue to disappear, which will cause rents to rise.
Owners and investors of rental housing stand to profit in the coming months from the tightening rental market. But for renters, they’ll find the rental market increasingly challenging, the study says.
Single-family home foreclosures may help relieve some of the pressure in the rental market, according to the study. With the number of foreclosures skyrocketing, some of these single-family home foreclosures may add to the number of rental units and even help stabilize distressed neighborhoods that have been badly hit by the foreclosure crisis, the study says.
Source: “Harvard Study Warns of Rent Bubble,” RISMedia (June 2, 2011)
2011 county rental chartSan Diego County, with its relatively strong economy, stands to lead Southern California’s apartment market out of the doldrums in the next year, according to a University of Southern California report being released today.
Rents will rise here first and vacancies will fall the most in the five-county region during the next 12 months, the report said.
“After a dismal 2008, Southern California’s apartment markets showed signs of improvement in 2009,” said the report to be presented to the annual Lusk-Casden multifamily housing conference in Los Angeles. “San Diego will continue to outperform the other Southern California markets in rents and vacancy rates, just as it has over the last year.”
Co-authors Richard K. Green and Tracey Seslen forecast a 0.4 percentage point decline in San Diego’s apartment vacancy rate to 4.5 percent. Monthly rental rates will rise a projected 0.7 percent, from $1.52 per square foot to $1.53 next year. For a 500-square-foot apartment, that works out to a $5 increase per month to $765. A year ago, the rate was $1.56, or $780.
The report casts San Diego in a slightly more optimistic light, in contrast to the other four counties, Los Angeles, Orange, Riverside and San Bernardino, where rents are expected to drop, even though occupancy levels are inching up.
Orange County has a lower unemployment rate at 9.7 percent than San Diego County’s 10.6 percent, an all-important factor in determining renters’ ability to afford various types of housing.
“A question is who has the tighter supply at the moment,” Green said. “That’s the most important driver in our models of rents going forward. In both places, we expect rents to be flat for the next year or so.”
Still, San Diego is serving as a bellwether for improved apartment conditions — at least from the investor and landlord standpoint — thanks to military spending and the rising biotech industry. Those and other factors promise to buoy the region in the next year and keep rents from falling further, the report said.
“San Diego is probably a little more amenable to recovery because of the characteristics of where the jobs are, in firms that are more likely to be hiring faster,” Green said. “It’s not like Riverside County, where home building was the principal driver, or San Bernardino, where distribution is the principal driver. Orange County, if you look at its overall history, has unemployment that is very high by its own standards. It was the center of subprime lending. That’s a whole lot of jobs that won’t be coming back anytime soon.”
Making the apartment market slightly more problematic is what the authors call a “shadow inventory.” It’s made up single-family houses and condominiums whose owners have rented them out until prices rise enough for owners to sell them at a profit. There also are thousands of distressed properties bought by investors, who then rent them out. Since figures on those categories are hard to come by, analysts find it difficult to predict how or when the apartment market will return to normal.
Norm Miller, a vice president at Co-star Group in San Diego that tracks real estate trends, said he estimates the size of the shadow inventory nationally at 17.7 million units, nearly as big as the 22 million rental apartments. He guessed the proportion is probably the same in San Diego.
“They can flip back to the owner-occupancy market if the market does better down the road, and at the same time, it’s a way to carry them for now (as rentals),” Miller said. “So they consistently provide a more flexible supply to the rental market.”
For San Diego, he said rental rates may rise faster than the USC report suggests.
“Sometime in 2011, probably earlier in the year, you will see rents start to increase,” Miller predicted. “The first sign of that will be no free rent, less concessions; that might happen by the end of this year.”
But Robert Pinnegar, executive director of the San Diego County Apartment Association, said he does not expect a major recovery in rising rates, though he agrees the signs of an increase are evident.
“San Diego is the bright spot in the nation, outside of Washington, where it has not declined at all,” he said. “It’s the adage — first in, first out with regards to the recession.”
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