Housing skid beginning to affect rents
When Riverside County landlord Eloise Figueroa learned that her tenant was about to move out of her four-bedroom home in Perris and into a lower-priced rental house, she sprang into action.
“I said, ‘Where are you going? What are you paying? OK. That’s your new rent,’ ” said Figueroa, who agreed to cut her renter’s $3,000 monthly lease by $150 to keep him.
After years of substantial increases, landlords throughout Southern California are finding it’s getting harder to increase rents at the same torrid rate. On average, rents are still rising, but more slowly than they have been.
No place is the phenomenon more pronounced than in the Inland Empire, where the slumping housing market is creating new competition in the form of vacant and unsold homes.
What’s more, Riverside and San Bernardino counties have experienced a boom in new apartment construction that dumped nearly 5,000 units on the market in the last 12 months.
“There has been more new supply in the past year than in the past five years,” said Delores Conway, a USC economist. “With this much supply, the demand has not been as strong.”
The occupancy rate in the Inland Empire fell to 93% in the second quarter from 94.9% a year ago, according to data being released today by RealFacts, a Novato, Calif.-based research firm. Experts say occupancy of 95% or better is necessary for a building to be considered fully occupied.
And even though rents in the two-county region rose on average 4% to $1,153, it was the slowest annualized rate of growth in a year, according to RealFacts, which tracks rents at apartment complexes of 100 or more units in 15 Western states. Its data are considered a reasonable gauge of general rental market trends.
Landlords elsewhere in Southern California also experienced sliding occupancy rates and slower rent growth. In Los Angeles and Orange counties, the average monthly rent in the second quarter rose 6.4% to $1,607, compared with a year ago, but the pace of rent growth was the most sluggish in a year, and off the 7.5% in the fourth quarter of 2006. Meanwhile, the occupancy rate slipped 0.6 of a percentage point to 95.3%.
In Ventura County, where landlords had been enjoying nearly 9% year-over-year growth rates, the average rent rose 7.2% to $1,542, as the occupancy rate fell 2.7 percentage points to 93.8%.
“Southern California is definitely slowing, and the Inland Empire is slowing big time,” said Chris Bates, a RealFacts analyst.
During the Southland’s housing boom earlier this decade, landlords found themselves competing with sellers to attract tenants. Low interest rates and creative financing made owning a home in many cases as cost-effective as renting. As a result, occupancy rates fell below 95% and rent hikes were tamed.
But as home prices soared and interest rates rose, some would-be buyers became renters, driving up demand and giving landlords more leeway to hike rents. In the third quarter of 2006, Los Angeles County’s average monthly rent, for instance, surged 8.3% year over year.
“The housing market has a substantial effect on the apartment market because as housing prices grow, the [gap] between renting and owning grows,” said Robert Budman, partner and vice president of acquisitions for StarPoint Properties, a Beverly Hills real estate investment firm that owns some 1,800 apartment units in Southern California.
In June, the typical monthly mortgage payment of Southern California home buyers was $2,430, up from $2,422 a year ago, according to real estate research firm DataQuick Information Systems. That’s in contrast to the Southland’s average monthly rent of $1,400 for the apartments surveyed, RealFacts’ second-quarter report said.
But now as the housing market is starting to temper -- and home prices in some neighborhoods are declining -- landlords’ ability to push up rents could be curtailed.
That’s what appears to be happening in the Inland Empire. Since the third quarter of 2006, when rents rose 6% year over year, rent growth has been losing steam as the inventory of unsold new and existing homes rises and new apartments pour into the market.
“The Inland Empire is one area in Southern California that we are concerned about some future softness because of the glut of homes, which could go back to rentals, in addition to the new units,” said Budman, whose firm sold most of its assets there in the last year.
In the year that ended June 30, 4,955 new apartment units were completed in the Inland Empire, with the majority -- 3,500 -- in south Riverside County, said USC’s Conway, who conducts an annual study on Southern California’s multifamily market. Although she expects them to eventually be rented as the economy creates jobs and the population grows, right now “there’s not much opportunity to increase rents.”
Figueroa, who owns four homes in south Riverside County, has a plan to deal with the slowdown. She is giving new tenants the option to buy by applying their monthly lease payments to a mortgage that she’s willing to carry.
“When you have a housing recession, this is the sort of thing that happens,” she said.
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Higher vacancies, yet higher costs
Average rents and occupancy rates for large rental complexes in the second quarter, by county and overall
*--* % change Change Average from Occupancy from Area rent year ago rate year ago Los Angeles $1,660 +6.5% 95.6% -0.1% Orange 1,551 +6.1 94.9 -1.1 Ventura 1,542 +7.2 93.8 -2.7 San Diego 1,345 +5.4 95.2 0 San Bernardino 1,168 +4.8 94.0 -1.2 Riverside 1,137 +3.2 91.6 -3.2 Southern California 1,400 +5.9 94.2 -1.3