MyNewPlace Blog

According to an article in the Press-Enterprise, the primary newspaper of the Inland Empire in Southern California (Riverside and San Bernardino Counties) rental costs are expecting to rise modestly in 2008 for that region. The resiliency of the Inland Empire's rental market is notable, as the region has experienced serious economic volatility; rental rates are expected to increase around 2 percent in 2008, following a similar trend in 2007.

According to the L.A. Times, the region, east of Los Angeles and North of San Diego, has experienced 50 percent growth in population since 1990 and has witnessed one of the highest foreclosure rates in the nation following the subprime mortgage crisis.

The USC Casden Multifamily Forecast Report, cited by the Press-Enterprise, which is released annually each April, predicts that existing apartment rents will increase between 2 and 2.5 percent. The average apartment for rent is expected to rise from around $1,100 to around $1,135.

The Inland Empire is an interesting microcosm of the apartment rental market. Demand for apartments is expected to increase due to economic growth as well as the influx of tenants from foreclosed houses into the apartment rental market.

On the supply side, new apartment construction as well as a “shadow market," consisting of house and condos that have been converted to rentals by their owners, is predicted to keep up with demand for apartments.

With all these extreme factors in play, it is reassuring that apartments for rent have not fluctuated as wildly as home prices and populations. Although, those hoping that the real estate melt-down would result in cheap apartments for rent may be disappointed, it is much better for long term growth that renters will be able to find affordable apartments so that they may continue working and raising families in the region.

As the Fed keeps raising interest rates and demand wanes for single-family homes, national apartment investors are in an excellent position. Revenue began to grow last year, a trend that should continue in 2006 and beyond. Apartment building owners are beginning to capitalize on the growing population of Americans who are unable to buy a house, particularly in major metropolitan areas, because of rising mortgage rates and unaffordable price points. In response to this demand, an increasing number of owners removed their Free Rent signs from outside of their properties. Concessions have virtually dried up, with the average forecasted to drop to less than three weeks of free rent by years end.

Feeling the Love from Everyone
Higher mortgage rates will not only stifle the flow of renters to the for-sale sector, but will likely return some home owners to the rental apartment sector. Softening underwriting requirements and low monthly payments made possible by adjustable-rate mortgages, have allowed some buyers to qualify for home loans that could very well become unaffordable once interest rates adjust. In other words, future loan defaults are not out of the realm of possibility. Since 1995, homeownership among those younger than 35, which is typically considered the prime renter cohort, soared 400 basis points to 49 percent. Record-high prices and rising mortgage rates will likely cut into the homeownership rate in this age group over the next few years. An increased number of immigrants relocating to such regions as Southern California, South Florida and New York City, will drive renter demand even higher. And as the last of the echo boomers move beyond their teenage years over the next decade, demand for apartments will keep climbing.

Playing the Condo Wildcard
While a healthy number of condo conversions are still occurring in South Florida, New York City, not to mention within a number of secondary urban markets throughout the United States, the fate of this sector remains unclear. A significant drop in condo buyer demand, and the looming threat of a decline in prices, could return thousands of units back to the rental market. Fortunately, the number of new apartment units being constructed should slightly outpace 2005 levels, and several economic and demographic trends are working to the apartment markets favor.

Forecast for the Year Ahead

• Vacancy Dwindles: Vacancy declined 100 basis points last year, hitting a low of 5.8 percent. The class A apartment sector saw the greatest gains. Vacancy dropped 150 basis points.
• Rental Growth: Effective rents rose 3.7 percent last year while asking rents advanced by about 2.5 percent. Higher occupancy rates at properties across the country have allowed owners to drastically reduce concessions.
• Moderating Construction: Completions of new units are expected to increase slightly, but remain below 100,000 units in 2006. Over the past few years, developers have proceeded with caution due to oversaturation in many major markets, which has led them to try their hand at condo development.