Even Rentals Aren't Faring Well in This Economy

by: Zacks Investment Research

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 (NYSE:C), Bank of America (NYSE:BAC), JP Morgan Chase (NYSE:JPM), US Bancorp (NYSE:USB) and Wells Fargo (NYSE:WFC) will continue to experience negative commercial real estate credit quality trends during the coming quarters.