NEW YORK, NY - The housing downturn started out as a boon to apartment landlords as troubled homeowners became renters again. But as the recession deepens, the good times for landlords are ending and many are offering concessions and discounts. Figures to be released Wednesday by New York-based research firm Reis Inc. show that effective rents, which includes free rent and other landlord concessions, fell by 0.4 percent in the fourth quarter of 2008, the first time that rents have fallen since early 2003. For 2008, rents increased by just 2.2 percent, down from 4.6 percent last year, and the nation's apartment-vacancy rate rose nearly one percentage point to 6.6 percent.
"It's now clear that apartments are going to take a much bigger hit than what most people initially expected," says Hessam Nadji, a managing director at commercial real-estate brokerage Marcus and Millichap, which is set to release a separate report Wednesday projecting no growth in apartment rent for 2009. Even cities that posted healthy rent increases in early 2008, including San Francisco, Seattle and New York, are no longer immune from the chill as job losses in the professional-services sector reduce demand for apartments. In periods of rising unemployment, would-be renters double up in apartments or move in with friends and families. Revenue growth is "going to be materially worse than it has been" over the next two years, says Andrew McCulloch of real-estate consultancy Green Street Advisors Inc. Rents stayed flat or declined in 59 of the 79 markets tracked by Reis last quarter, and vacancies decreased in just 10 markets.
Already, publicly traded real-estate investment firms are battening down the hatches. AvalonBay Communities Inc., an Alexandria, Va.-based REIT, said last month that it would halt all new construction in the first half of 2009, incurring a noncash charge of $55 million to $65 million for eight land parcels that won't be developed. Also last month, Atlanta-based Post Properties Inc. cut its quarterly dividend to 20 cents, from 45 cents, to save about $43 million annually.
While New York City's vacancy rate, at 2.3 percent, remained the best in the nation, rent growth fell by 1.9 percent in the fourth quarter from the third quarter, the worst decline in the country. Rents gained just 0.6% for the year in New York, a sharp reversal from just two years ago, when rents posted 8 percent annual increases. Heavy job losses are likely to curb Manhattan's appetite for luxury housing that spurred the construction of gleaming new apartment towers in all corners of the city.
As financial-services firms shed jobs, owners also are relaxing upfront fees and offering one or two months of free rent. In December, Archstone Apartments, a privately held owner of 70,000 units, offered one month free rent on one- and two-bedroom apartments in Manhattan priced between $3,000 and $5,500 at several properties, while others waived security deposits for qualified tenants or gave away $3,000 Visa gift cards. "Owners are concerned. They have more vacancies than they care to admit, and will do anything it takes to fill them," says Daniel Baum, chief operating officer of the Real Estate Group of New York, an apartment broker.
New luxury rentals in New York's financial district have been particularly hard hit. Jake Dardashtian moved into a one-bedroom apartment at 10 Hanover Square, a luxury high-rise, with a roommate in November after being offered one month's free rent and a free gym membership valued at $75 monthly. The building also paid his broker's fee, which was equal to the $3,500 monthly rent.
The 22-year-old money manager, who moved in with his parents after graduating from college last year, says that without the concessions, "I definitely would have lived at home for a couple more months to save money."
Other owners are simply reducing rents. At Post Properties' Post Forest community in Fairfax, Va., two-bedroom units are renting for $1,350 per month, down from $1,480 last year.
Other storm clouds loom for apartments. The industry continues to be battered by a "shadow market" of condos and single-family homes being rented at big discounts by homeowners and investors unable to sell. That excess inventory, estimated at around 1.2 million housing units, showed no signs of easing during the first nine months of 2008, even as housing construction declined sharply, said Ron Witten, a Dallas-based housing analyst.
In some of the hardest-hit markets, falling home prices also could lure potential apartment tenants with good credit and savings. In Fort Lauderdale, Fla., for example, rents during the third quarter averaged $1,125, according to CBRE Torto Wheaton. With 20 percent down on a $134,000 home , the median price for the region, monthly mortgage payments before taxes average just $820.
Longer term, however, some analysts believe that apartment companies will likely benefit from the limited amount of new apartment construction that took place over the past five years. For example, the number of new apartments completed last year, less than 100,000 units nationwide, is about half the number that was completed in 2000 and the lowest in 15 years. The constrained supply, coupled with favorable demographics, won't blunt the current downturn, but it should boost the industry when the economy recovers.
The financing options also are more favorable for apartment companies than most other sectors in commercial real estate, where owners are struggling to refinance debt. That is because the industry is buoyed by government-led Fannie Mae and Freddie Mac, which provide liquidity to the housing market. Fannie and Freddie provided 80 percent of new multifamily financing in the 12-month period ending in August, nearly double the 40 percent financing that the firms provided in the previous year period, according to analysis of Federal Reserve data by Gleb Nechayev, senior economist at CBRE Torto Wheaton Research.
Source: WSJ.com