MyNewPlace Blog

Last week on Multifamily Insiders, Michael Cunningham of Real Page wrote an article, Imaginary Roommates Don't Pay Rent, which examined the much discussed rental phenomenon of doubling up. Mr. Cunningham contended that although anecdotal information (glorified on the internet) seemed to suggest that a very significant number of renters are moving in together to save on rent and that this would be a significant trend for the rental market, the numbers just don't support that kind of trend.

Our data, which is how renters search, not occupancy rates, shows that there is in fact a significant uptick in demand for apartments with more bedrooms and a corresponding drop in demand for 1 bedroom apartments. It is important to remember that these two accounts do not conflict, as MPF Research reports occupancy data, whereas we are relying solely on renter search behavior.

Since millions of renters come to our site each month, we wanted to share some patterns that we have seen over the past year and a half regarding not occupancy rates according to MPF research (as is cited in the aforementioned article), but rather, how renters are searching. Renters are overwhelmingly using the internet as a primary resource for their apartment search; therefore, our search data is a good indicator of what renters are seeking.

The chart below documents all searches conducted on MyNewPlace and clearly shows that searches for 3 bedrooms gained at the expense of 1 bedroom searches:

The biggest shift occurred in Q1 2009, where searches for 3 bedroom apartments grew from a 22 percent share to a 31 percent share, 1 bedroom apartments dropped from a 32 percent share to a 25 percent share, and 2 bedroom apartment searches fell slightly from 46 percent to 44 percent.

We must assume that this trend is due to renters trying to find 3 bedroom apartments to save money. Initially, the patterns in the chart seemed intuitive. If you can't afford a 1 bedroom apartment, you probably cannot save that much money by moving into a 2 bedroom apartment; it is when you get into apartments with 3 or more bedrooms where the price per bedroom really begins to drop and renters can reduce their apartment budgets significantly.

Who are these renters, then, that are searching, but seemingly not moving into 3 bedroom apartments? Are they families who in the end opt for a single family home rental? Are they recent college students, who are researching places where they and their friend can afford to move into from their parent's houses?

Hello everyone! We are happy to be hosting the 158th Carnival of Real Estate; we received many great entries, six of which we have decided to share with the CORE readership. Although our site is only for apartments and homes for rent, our business is intimately linked with the for-sale market and we keep our eyes on and share many of the same issues and concerns.

This week's submissions were all very interesting, but we were able to narrow down our list of favorites to six; remember, posts should be somewhat current, we did receive a few from 2008 and 2007, which, however informative, will not be showcased here.

And now, for the winner:

Karen Goodman of Arch City Homes suggests a new approach to holding an open house: invite the neighbors! This may be counterintuitive, as neighbors are obviously not moving next door, but it does bring the real estate agent in close connection to that neighborhood in their city or territory, it brings about the possibility that the neighbors will have acquaintances looking and mention the listing to them, and if and when interested buyers do show up, they'll see a crowded house filled with what appear to be interested parties.

Karen's approach to inviting neighbors, “Choose Your New Neighbor," is outlined in the video above and we think it will be very successful. I know that on a Saturday afternoon many neighborhood people would be more interested than they'd like to admit in checking out the neighbor's house.

And here are the rest of the submissions in particular order:

The Real Estate Tomato gives great advice on the very first step that real estate agents need to take to get started reaching out to their online audiences, going to godaddy.com and buying a URL.

The Bigger Pockets blog (next week's host!) outlines a comprehensive list of costs that homeowners should be aware of before you try to flip that house.

Mortgage planner Dan Green at The Mortgage Reports blog shares how he quickly ballparks four different types of mortgage calculations, monthly mortgage payments on principal and interest, interest only, and how to calculate the amount of principal you pay for a given month or year.

Bob Schwartz at the Broker for You blog identifies an oft overlooked “rip-off" tactic occurring in the California short-sale market, where independent escrow companies, whose fees are not regulated, are trying to get a bigger piece of the pie.

And finally, The Housing Chronicles asks that age old question, is real estate a good hedge against inflation?

Of course, right before we sign off, we'd like to plug our CEO's latest whitepaper, Cost Effective Resident Acquisition, which helps real estate professionals develop a sound understanding of how to best leverage online advertising expenditures.

Thanks for reading to the bottom! Be sure to submit your posts for next week's Carnival of Real Estate, which will be hosted by the good folks over at Real Estate Investing for Real. Please leave us comments if you have questions or comments or contact MyNewPlace on twitter for a more interactive discussion!

REITs Boost Occupancy Rates

Last week, some good news for the multifamily industry appeared in an article from Multifamily Executive article titled Apartment Firms Report Slight Upticks in Occupancy. The data primarily comes from REITs, who have ostensibly been reducing rents in an attempt to boost short term occupancy. REITs prices have taken it on the chin during the first two quarters on 2009, prompting an increase in dividends and more recently, it appears that many are undertaking the strategy (at least in soft markets) of getting renters into their properties and betting that it will be less costly to retain them at lower rents than wait for a market recovery to charge higher rents.

REITs like UDR have been able to increase occupancy by using investment capital to maintain properties while at the same time cutting rents, thereby becoming an attractive alternative to all renters. UDR's senior vice president of operations also credited that company's technology-based leasing initiatives with having a major impact on reaching out to potential renters. [Multifamily Executive]

San Francisco Apartment Rental Market Stabilizes?

In a related story, the cover of this morning's San Francisco Examiner featured a “Calling All Tenants" article, alerting renters around the city to the deals on San Francisco apartments. Luxury apartments and condo conversions that once had astronomical price tags are now desperate for tenants. Paying over a $1,000 for a room in a 3 bedroom apartment in Hayes Valley? You may be able to afford a luxury 1 bedroom less than a mile away.

Forcing vacancy rates up and effective rents down are the combined factors of a surplus of new development conversions in the SoMa district, a loss of 43,000 jobs between Septemeber 2008 and May 2009 and the high cost of living in San Francisco.

The interesting section of this article comes from a quote by International Colliers residential broker Stephen Jackson, who said, “The market, for the most part, has stabilized." Indeed, the figures show that the average rent for a one-bedroom apartment bottomed out at $1,874 in May 2009 (rising to $1,902 in June). Does this indicate equilibrium? [San Francisco Examiner]

At the beginning of the month we discussed the NMHC's Apartment Market Conditions survey for the second quarter of 2009, which used 4 indices to measure perceived changes on Vacancies, Sales Volume, Equity and Debt Financing.

Last week, we received a more detailed report from the NMHC, based on concrete numbers, which quantifies the apartment rental market's Q2 performance according to Vacancy rates, Multifamily permits and starts, net absorptions, rents, transaction volume and mortgage debt.

Apartment Vacancy Rates

The Market Tightness Index (vacancy rate survey from earlier in the month) scored a 20 out of a possible 100, which indicates a continued trend of higher vacancies, but at a decelerated pace compared with Q1, which scored 16. The U.S. Census Bureau vacancy rate for all apartments rose to 12.2 percent, the highest in recorded history. The M/PF Research recorded 8.1 percent, the same as Q1 2009; geographically, vacancies rose in the South, remained steady in the West and declined in the Northeast and Midwest.

Apartment Rents

Unfortunately, information on national apartment rent changes differs according to source; M/PF Research reported that rents had declined a record-breaking 3.4 percent, not counting deflation (which softens the hit to 2.2 percent), whereas the CPI rent index, rose by 2.9 percent in that same second quarter. Once deflation is added, however, the CPI rent index rose by 4.1 percent, the highest in 55 years.

So how does an apartment marketing professional reconcile such disparate numbers? For one, the M/PF Research only includes investment grade apartments, which includes higher end apartments, which understandably suffered the most drastic rent drops. In the M/PF breakout above, it is evident that the most significant rent decreases by far are from the western part of the nation. Has anyone's rents dropped by over 6 percent this year?

The CPI index includes all rental housing, counting rental homes, affordable housing and apartment building with fewer units in their index, but only in urban areas. Basically the disparate rent trends indicate, by the characteristics of their respective samples that renters are moving out of higher end apartments in suburbs and there is more competition for more affordable apartments in more urban areas.

From the erudite desk of the NMHC come a press release on that organization's most recent Quarterly Survey of Apartment Market Conditions (July 2009), which modestly highlights some possible signs of stabilization. The chief concern remain the stifled rental demand due to high unemployment, which is directly contributing to lower property valuations; that, of course, has resulted in the worrisome overall constriction of debt financing.

The Survey uses 4 indices to gauge changes from last quarter's market conditions: the Market Tightness Index (measuring occupancy rates), the Sales Volume Index, Equity Financing Index, and the Debt Financing Index, which should be read to mean that if the number is over 50, things are improving, if the number is below 50, things are getting worse, and if the index records 50, then conditions have stayed the same.

Below is a graph of each of the 4 Market Indices over the past ten years (note that none of the Indices has been over 50 since Q3 2007)

Market conditions are seen as stabilizing because although all four indices posted below 50, 3 out of 4 have increased (with the exception of the Debt Financing Index). Thus, things are worse than they were in Q1 2009, but the rental market's deterioration has decelerated.

The Debt Financing Index, the only one that continued to slide, reinforces the cautionary article for apartment owners that we related last week, about how lenders are extending lines of credit based on valuations determined by current rent income, which is making refinancing difficult. This is especially worrisome given that Bloomberg is reporting that $165 in commercial loans (of which the multifamily industry is a part) will mature this year. Some apartment communities may not have the income from rent to pay their mortgages and may be greeted with cold shoulders from lenders unwilling to refinance. Geographically, Orlando, Memphis and Chicago owe the greatest dollar value on collective commercial properties (this figure includes more than just multifamily properties).

This morning, the National Multi-Housing Council sent out its Weekly News Watch, which we thought included some articles that should be of interest to our readers.

At the top of the headlines was an article entitled, ‘US Multifamily Rents Could “Explode" in Three Years.' Naturally, we wanted to determine whether this was the good or bad kind of explosion. The article, however, goes on to explain that by “explode" they mean that on a nationwide scale, rents are expected to decline for at least another year and a half, after which rents may climb to higher levels, but wouldn't exceed the rents of 2005 through 2007.

Caldera Asset Management co-founder Mike Kelly explained that lenders are only giving loans and basing credit lines based on currents rents (and therefore values) instead of future values, as was common before 2007.

This should have two effects: one, that there will be no new construction to offset rental demand when the economy begins to grow again, and that as a result, rents should be rather strong in 2011 going forward; two, that since credit lines are being adjusted to values based on current rents, then “apartment owners should be ‘very realistic' about the prospects of their assets going forward." Since many owners are still holding onto their assets, now may be a good time to sell, as 18 months of declining rents will surely bring many properties to the auction block, increasing that supply and lowering prices even further.

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Fueled by the climbing unemployment rate, vacancy rates in the nation's apartment buildings have risen to their highest rate since 1987. The national vacancy rate reached 7.5 percent in the second quarter, up .2 percent from the previous quarter and 1.4 percent higher than Q2 2008.

The speed that the vacancy rate is approaching the all time high (7.8 percent in 1987) is especially worrisome; it was only 2006 when the only 5.5 percent (that cycle's trough) of apartments for rent were vacant.

As a result, Q2 asking rents fell .7 percent from a year ago to $1,040 a month, the bulk (.6 percent) of that drop occurring in the second quarter. Effective rents fell even further, down 1.9 percent to $975, that decline spurred on by apartment management companies offering concessions to renters. Effective rents dropped almost 1 percent from the first quarter to the second in 2009.

Reis, Inc, who conducted the study, expects more than 100,000 units from new construction to add to the rental inventory by the end of the year, which, along with unemployment rates softening demand, will keep vacancies high and rents low.

Regional and Demographic Trends

Earlier this week we mentioned housing statistics from the Census Bureau (which include both the rental and for sale markets) showed a higher growth rate for urban areas than in suburban areas. While the national rental market figures are useful as macroeconomic indicators of the economy as a whole, they don't exactly provide insightful information for apartment management companies in terms of their respective markets.

Below is chart with projections from the Jackman Group for 2009:

According to the LA Times, the effect of the high vacancy rate is visible to anyone walking down the street, even traditionally popular areas. Landlords are dropping rents and making concessions for Westwood apartments and apartments in Redondo Beach, trying to keep their units occupied.

The only apartments in Los Angeles where rents haven't gone down are those apartments near UCLA, where demand is buttressed by college students. Also, UCLA, with a high percentage of graduate students will probably have more students than during years where the job market was stronger, as young professionals take the opportunity to go back to school.

With almost 2,000 units in the construction or planning phase this year and rampant job losses, Greenville apartments‘ vacancy rates have risen high above the national average at 12.5 percent.

There are a few bright spots, however. Apartments in Columbus, Ohio, are currently enjoying their lowest vacancy rates in years, investors are beginning to buy up Orlando apartments again and renters moved into Atlanta apartments in volumes that far exceeded previous quarters.

What is going on in your market? Are you seeing a higher demand for urban apartments over suburban buildings?

Does the reported increase in the difference between asking rents and effective rents make sense in terms of concessions that are offered to renters?

On Monday April 27th, both the U.S. Census Bureau and RealFacts.com released first quarter rental statistics, with some discrepancy, but both indicating a prolonged decrease in demand for rental housing. The Census Bureau provides a national and historical perspective compared to homeownership, while RealFacts' survey is focused at the MSA level.

The Census Bureau reports that the national rental housing vacancy rate has held steady at 10.1 percent from Q1 2008, with no statistically significant variances throughout 2008. On the chart below, you can see the lowest vacancy rate was from the first Quarter in 1997 and the highest in the first Quarter of 2004.

Some more granular statistic from the Census Bureau include the following facts; national vacancy rates inside principal cities increased from Q4 2008 and were higher than the national average at 10.6 percent, whereas the suburban rate decreased and was below the national average at 9.5 percent.

Geographically, the highest vacancy rates were in the South, at 12.9 percent and lowest in the Northeast at 6.9 percent. The Census has added some nice new graphs which detail geographic vacancy rates since 1968.

From RealFacts.com, we see a more downward overall trends, but at from city level. Three quarters of MSAs showed an occupancy decline of more than 1 percent, compared to Q4 2008, when only 30 percent experienced that kind of reduction in occupancy.

Apartment marketing professionals have been keeping a sharp eye on how the rampant foreclosures are affecting rental supply across the nation. Of course, unemployment figures are worrisome and are a key indicator of expected rental performance, but what of the looming specter of the shadow market?

On the one hand, it is reasonable to predict that many will return to the rental market and that renters who were considering homeownership will remain in their apartments. On the hand, however, what of the myriad homes now vacant and eligible for rental? Will renters be attracted to those properties, and if so, how will they compete with apartments for rent?

We have seen a noted uptick in the volume of searches that focus on single family homes for rent over the course of the past year. Below we selected some of the larger metros to compare to the national average:

As you can see, renters in all metros have shown an increased desire throughout the year to search for single family rental homes; the most notable increase is in the DC area, which includes the neighboring rental markets of Arlington and Alexandria. The spike in the fourth quarter could have been fueled by the influx of new government employees trying to relocate their families, (which happens every 4 or 8 years) and may be partly due to folks looking to sublet a rental home for the inaugural weekend.

In Miami, everyone has been predicting that condos originally built for sale are now flooding the rental supply; above, we see how renters looking for apartments in Miami have begun to include home rentals in their searches.

What have others seen among their renter's preferences? Which markets has the shadow been cast long upon?

Last month, we relayed information from REIS, Inc regarding how apartment rents had decreased for the first time in 5 years in Q4 of 2008.

That report is reinforced by a recently released study by RealFacts.com, which provides “the first comprehensive assessment of the rental market in 2008."
According to RealFacts:

• Rents declined in nearly every MSA between September and December of 2008
• Nationally, the average rent dropped from $1002 in September to $993 in December
• Nationally, the average occupancy rate dropped from 92.9 percent to 92.2 percent, leaving 10,000 apartment units vacant at the end of the year
• In 2008, only 9,248 units were added to overall supply, compared with the average of 65,000 units per year for the past ten years.

The cities that experienced the greatest drops in rents were all located in the Sunbelt, mainly in California and Florida. These drops followed bursts of job growth and construction.

Many Miami and Fort Lauderdale condos that were originally built for ownership are now being converted to rentals, flooding the rental supply. Other communities, located in Southern California's Inland Empire and tech heavy South Bay area, are facing steep unemployment as well as competition from the shadow market's foreclosed home supply.

• Miami apartments (2.4 percent)
• Riverside apartments (2.4 percent)
• San Jose apartments (2 percent)

Both reports emphasize how the oversupply of rental housing options coming onto the market as well as the steep declines in employment will shape the 2009 rental market. Overall, renters are expecting to look forward to cheaper rents and better options.

Apartment managers need to focus now more than ever on filling their vacancies in the most cost effective way possible. This means keeping track of every lead so that you can use advertising resources effectively.

With competition for renters looking like it will increase dramatically, make sure you are ahead of the curve by either requesting a copy of Multifamily Marketing in the Internet Age or contact us about a customized rental trend reports for your city.