Even Rentals Aren't Faring Well in This Economy 17 comments
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By Eric Rothmann
Given our current economic environment, what appears to be a counter-intuitive trend has evolved. At 7.5%, the national vacancy rate for U.S. apartments is poised to broach the highest rate of 7.8% recorded in 1986 since the data has been tracked.
As of 2Q09, the vacancy rate was 20 bps higher on a linked quarter basis, and up from the 5.5% cyclical attained during 2006. In order to retain some of the occupancy levels, many landlords have sacrificed rental income and enhanced renter concessions/incentives. When these concessions/incentives (such as free months of rent and other items), the effective vacancy rate was down 0.9% on a linked quarter basis and down 1.9% year-over-year.
As a result, 2Q09 asking rent fell 0.7% year-over-year to $1,040 a month, and down 0.6% from on a linked quarter basis. In the U.S.’s largest U.S.’s apartment market, New York, vacancies fell 0.5% on a linked quarter basis and a 4.0% declined year-over-yearto 2.9%, despite a 1.7% decrease in rent to the $2,680 level. In addition, other areas of the country (such as Las Vegas, San Francisco and San Jose, California) had effective rents that dropped more than 2.0% year-over-year.
Nationally the picture may grow worse, with approximately 45% of the more than 100,000 units from new construction for 2009 already on the market. As unemployment has continued to mount, the largest tenant group -- 18-24-year-olds -- has been hardest hit.
With general expectations of an economic recovery pushed back to early 2010, lower rents and higher vacancies should be expected to continue over the near term.
With the apartment buildings sector typically the leader for all commercial real estate categories with respect to defaults, it is extremely probable that financial institutions such as (but not limited to) Citigroup (C), Bank of America (BAC), JP Morgan Chase (JPM), US Bancorp (USB) and Wells Fargo (WFC) will continue to experience negative commercial real estate credit quality trends during the coming quarters.
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This article has 17 comments:
Also as unscientific as it may be, I do also see the trend of moving back in with ma & pa and grand Ma & grand Pa. When people lose their job and have no income and no savings... you only have so many options.
The whole thing is just a mess, don't just look at home prices, look at these BEHAVIORAL changes and it's amazing when you think about it.
My comment is hard to say...in America you would not think it could happen. Here is a excerpt from the NY Times.
"The surging number of homeless people in Fresno, a city of 500,000 people, has been a surprise. City officials say they have three major encampments near downtown and smaller settlements along two highways. All told, as many 2,000 people are homeless here, according to Gregory Barfield, the city’s homeless prevention and policy manager, who said that drug use, prostitution and violence were all too common in the encampments".
This is only one of dozens arcross many cities in America. It feels like the GD 2 Sometimes, at least I bet it does to them. Reality Check!
As for Obamavilles, thankfully I haven't seen any sprout up yet.
In the LA metro area, the "lucky" 18-24 year old college graduates get to work in fast-food but that doesn't pay for a roof over your head and most will lose their relatively new cars they took out expecting to get that college level job after graduation... I got out of college during the 1990-1991 recession, but this one is a depression for the youngest workers.
In Michigan, which is beginning to look like the nation's water-tester for the "True Depression," thousands of buildings and homes just sit empty.
No signs, no foreclosure stickers and no occupants.
Just empty.
No jobs, no customers and no economy. Seems to be heading that way faster and faster.
In order to get a new high-quality (good credit rating) tenant, I had to cut rent about 20% to be competitive relative to buying. Also the underlying value of the property has come down at least that much from its theoretical peak, so it is not really surprising the rents come down some.
I consider myself lucky it is *only* a 20% income hit. People with their money in CDs have taken a 50% or more cut as interest rates scrape bottom.
There are a huge number of vacant buildings now. Landlords it seems would prefer to let them sit vacant than to rent to so-called risky and unemployed renters. Price reductions for the moment are out of the question for many companies already strung out and making ungodly payments on properties bought near the peak.
But winter is coming. And plenty of social problems related to dislocation are going to change the minds of landlords as the risk of leaving a property untended and open to squatters is outweighed by the risk of having low-rent tenants occupy and care for the place.
There is a big difference between a small loss and a total loss when it comes to rental income and you are on the ropes with your mortgage.
Landlords work in a formulaic way. They want references, they expect tenants to be employed and they prefer professionals. When they cannot find the desired tenant it has become standard practice to just leave the property empty until a good prospect comes along.
There is a general belief amongst most people that a recovery will happen eventually,....like later this year or in 2010. So they are holding out for the time being. No surprise. They have payments too.
A real recovery is totally unlikely though. We are headed for depression right now and all bets are on further declines in real-estate values, more job losses as winter approaches and a possible stock market collapse before November.
Landlords like almost everyone else seem unable to divine the tea-leaves of the damage to the economy brought on by high and persistent unemployment. They have failed to see that the best of the days are gone and that they will have to lower expectations if they want to earn a rental income at all.
Rental prices are truly a lagging indicator from this perspective. Wealthy landlords may hold out for the most solvent of tenants but any owner close to the edge with leveraged payments to the bank and rising interest rates will eventually cave and reduce rents.
The downward rent price cycle will not match the employment and income losses as they occur month by month but all rental prices will eventually be forced down at the risk of total losses to owners who cannot afford empty buildings.
In the big picture what we are about to experience is the flexibility of individuals to cooperate with one another and with family support to defeat the high price of rent by not participating in the market.
Thus a high vacancy rate as adult children return to live with parents, as students save on costs by sharing rooms in houses, and as density increases in inexpensive neighborhoods as more people share common spaces is expected.
Pricey rentals left out of the market for too long will see owners acquiesce and engage the market through price-cutting, incentives and other forms of competition. It will be cut-throat. But the market will find a new balance and homes and apartments will be filled again.
But at lower and lower prices.
Current rental prices are unsustainable given the asset destruction and real estate collapse to date. This is a warning to landlords who depend on rent to pay the bills.
Your solvent days are numbered if you cannot adjust to the new reality or dump your property. Time has almost run out.
On Jul 08 11:21 PM bigmoney wrote:
> the solution is to tax and high fee the homeless and unemployed.
> Homeless who setup a tent or sleeping bag should pay property tax
> for that square of earth they are hoarding, along with income tax
> for coins they guilt others into giving them.
I agree with most of what you say but renting to lowlifes is usually worse than leaving your property vacant. After you finally manage to evict a lowlife for nonpayment of rent there's a big expensive mess to clean up before the place is ready to offer for rent again. I've come to the conclusion that a bad tenant is worse than no tenant.
You're right about overleveraged landlords, though, who need warm bodies to at least theoretically generate some cashflow to pay the mortgages (theoretical because delinquent tenants don't pay their rent). But because I agree with your assessment of the degrading state of the rentals market I think overleveraged landlords, and the bankers who hold these properties as collateral assets on mortgages, are in for a fall.
I assumed that bigmoney was engaging in caricature and sarcasm.
bigmoney - - -
You might be accused of gallows humor. By the way, I have learned the hard way it is advisable to label attempts at humor or they will be misinterpretted by many.
If you were being serious, you were way out of bounds.
rgj.com/article/200906...
Apartments are advertising free rent for a month if you sign a 12-month lease.
Every neighborhood in town has vacant houses for rent.
There's no upward pressure on rents, and landlords are starting to feel the pain. In some cases, it's better to have a crappy tenant that pays late and doesn't take care of the property than to have no tenant at all.
After all, there's usually a mortgage payment due every month, whether the units are rented or not.