Upward rent spiral may be slowing down
Renters in Southern California may be getting some relief, with landlords lowering their asking rents and offering move-in incentives amid signs that the apartment market is softening.
Average vacancy rates at major apartment complexes rose in most Southern California markets during the fourth quarter while the rate of annualized rent increases slowed in many locales, according to data being released today by RealFacts, a Novato, Calif.-based research firm.
The rising vacancy rates could make it difficult for landlords to raise rents at the same pace in the future. Already, the owners of many large apartment buildings are offering move-in specials and other bait to lure renters. A big reason: There are more units available thanks to a boom in apartment construction.
It’s a trend that parallels the Southland’s market of residential real estate for sale, where owners of new and existing homes have been reducing prices or offering incentives as the supply of homes rises.
Southern California has seen some of the steepest rent increases in the U.S. in recent years. As housing prices skyrocketed, some would-be buyers became renters, driving up demand and giving landlords discretion to hike rents.
But “there’s a point at which you push beyond where people can afford the price and you run into resistance,” said John Husing at consulting firm Economics & Politics Inc. in Riverside. “In supply and demand terms, the sign that the price has gotten too high is when you start seeing vacancies go up in the rental market, and inventories go up in the housing market.”
Even though the average rent at large apartment complexes in the six-county Southern California region rose 6.4% to $1,422 in the fourth quarter from a year earlier, the occupancy rate dipped 0.6 of a percentage point in the same period to 94.3% after being up the previous four quarters, according to RealFacts.
Some property managers report that households are doubling up in an effort to save money, which is causing vacancy rates to inch up, said Nancy Ahlswede, executive director of the Apartment Assn., California Southern Cities.
No place is the softening rental trend more apparent than in the Inland Empire. After years of strong rent growth, including a 7.4% annual gain in 2005’s fourth quarter, the Riverside-San Bernardino County region saw rent growth climb just 4.9% in the latest quarter to $1,141 from a year earlier, while the occupancy rate dipped 0.2 of a percentage point. What’s more, between the third and fourth quarters, the occupancy fell 3.7 percentage points.
That was the biggest quarter-to-quarter drop for any of the 28 markets covered by RealFacts, which surveys landlords of buildings with 100 units or more in 15 states. It was followed by Oklahoma City, where the occupancy rate fell 3.6 percentage points.
“Such widespread declines in occupancy likely herald reductions in rent growth rates,” a RealFacts summary said.
Some experts believe average rents actually may be lower, because RealFacts surveys landlords about their asking rents, not the final rent agreement they make with tenants.
“We’re seeing an increasing number of properties offering incentives” such as one month of free rent, said Jim Thomas, president of the multifamily property management division of real estate company Sares-Regis Group. Thomas said he noticed rental market conditions starting to soften in late 2006, as a surge of newly constructed apartments came on the market, particularly in the Inland Empire. More than 4,200 apartment units came on line there last year alone, a significant increase over previous years.
“We had more deliveries than we had seen in 20 years,” said Thomas, whose company owns apartment complexes of 250 units or more. “That causes rents to slow down.”
The Los Angeles-Orange County region remained the most expensive metro rental market in the Western U.S. In the fourth quarter, the area’s average rent rose 7.4%, to $1,567 from a year earlier.
But the occupancy rate in the two-county area dipped 0.8 of a percentage point to 95.2% from a year ago, and was down 1.2 percentage points from the previous quarter. During 2006, at least 2,100 new apartment units came on the market, RealFacts said.
Of the six Southern California counties, Ventura County experienced the biggest hike in rental growth, as the average rent rose 8.8% to $1,485. But the occupancy rate fell 1.5 percentage points to 94% from a year ago, and declined 3.1 percentage points quarter-to-quarter.
A complex with an occupancy rate above 96% is generally considered fully occupied.
Landlords who own fewer units are also starting to feel the squeeze.
Todd Chiriano has been trying to figure out what it takes to attract qualified renters for a handful of renovated condos he owns in Riverside.
Having lowered the asking rent every month since October, he seems at wit’s end. He’s now charging $895 to $950 for his one-bedroom units, after starting out at about $1,200.
“I’m flabbergasted,” he said. “I’m sitting here with six vacant condos.”
Chiriano, a real estate broker, said he had seen an increasing number of rentals, many owned by long-term investors like himself. “The problem with this area,” he said, “is there are a lot of rentals, which is helping to drive the market down.”
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The cost of leasing
Average rents and occupancy rates for selected rental units in the fourth quarter of 2006, by county and overall in Southern California
*--* % change Change Average from Occupancy from Area rent year ago rate year ago Los Angeles $1,614 +7.8% 95.3% -0.6 Orange 1,517 +6.8 95.1 -0.9 Ventura 1,485 +8.8 94.0 -1.6 San Diego 1,315 +4.9 94.4 -0.4 San Bernardino 1,149 +5.0 93.6 +1.3 Riverside 1,132 +4.7 88.9 -1.8 Southern California 1,422 +6.4 94.3 -0.6
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Source: RealFacts
