Landlords get new lease

Lost among the bad news of home foreclosures and the subprime-mortgage crisis is a ray of light in the world of real estate: Now is a fine time to be a landlord.

Industry observers say a growing number of people are hesitant to buy a home in a falling market and instead are choosing to rent.

As a result, apartments are filling up in Chicago and across much of the nation, rents are on the rise, and investors are taking notice.

On Thursday, Chicago-based Newcastle Ltd. announced it had bought seven buildings, with a total of 884 residential units, in the city's Lakeview neighborhood for $122.5 million.

"All of the properties are located in a small geographic area between Fullerton and Irving Park, within two or three blocks of the lake," said Michael Haney, chief executive of Newcastle, whose purchase speaks to the attractiveness of the rental market as an investment.

Newcastle takes a long-term view and doesn't flip its properties, Haney said. It pays mostly cash and buys in first-class Chicago neighborhoods.

The vacancy rate in Chicago for the first quarter of the year was 4.7 percent, according to Hendricks & Partners, a Phoenix-based real estate management company.

"Anything below 5 percent is considered a landlord's market," said Walter Molony, a spokesman for the National Association of Realtors. He noted that the national vacancy rate also stood at 4.7 percent for the quarter.

In past years, a rate of 7 percent was not considered abnormal.

"Renters are hesitating to get into the homeownership market," Molony said. "They are staying in rentals."

One of them is Aaron Wahrman, who lives on the North Side and recently renewed his lease. He wants to buy a condo, but not right now.

"It looks like prices should be coming down," he said. "I am just waiting it out."

Wahrman, who moved to Chicago from Dayton, Ohio, is still struggling with the great difference in housing prices.

"Here, $250,000, $300,000 maybe buys you a one bedroom with a parking spot," he said. "There, it bought you a palace."

Early decade drop

Rents were worse than stagnant in Chicago and many other markets during the boom in home sales earlier this decade.

Chicago-area rents went down between 2001 and 2003, according to CBRE Torto Wheaton Research.

In 2001, the average rent was $1,035 a month, according to Torto Wheaton. By 2003, the average rent had fallen to $980 a month. The average derives from all apartments in buildings with five or more units located in the greater Chicago area.

By the end of 2007, the average rental cost had rebounded to $1,079.

But some analysts do not expect rents to spike as housing prices did in recent years.

"Generally, a slowing economy is hurting" rentals, said John Coumarianos, an equity analyst with Morningstar.

When the economy stalls, rentals slow because fewer new households are formed. For example, roommates may decide to share a place longer, or adult children may delay moving out from their parents' homes.

In addition, Coumarianos said, some buildings once destined as condos are marketed as rental apartments.

While Chicago generally has followed national trends in residential rentals, industry observers say, it is showing strength unlike other Midwestern cities.

"In some markets ... people who can't sell their houses are opting to rent them out," said Scott MacIntosh, senior economist of the National Association of Realtors. That holds down rents in places like Detroit and Cleveland, he said.

Surge in rental units

Matthew Lawton, senior managing director of Holliday, Fenoglio Fowler, sees about 7,000 new rental units coming on the market in the next three years, well over the 4,500 that is typical.

And they won't fall under the category of low-income housing, he said.

"It's all going to be at the top of the market," Lawton said.

The credit crisis that brought housing to its knees has hurt the market for rentals, as lenders are unwilling to fund speculative deals, and borrowers are forced to have near-spotless credit histories if they expect a loan.

"The deal market is tighter," said Richard Levy, director of research for the National Multi Housing Council.

But loans are available for the right deals, said Steve Kundert, vice president of Cohen Financial, which helped Newcastle acquire the apartment buildings in Lakeview.

"Location is king of real estate," he said. "Certainly, the Lakeview market is one of the strongest in the city."