Rents heading up in '06
Apartments may get significantly more expensive to rent this year.
NEW YORK (CNNMoney.com) - Apartment rents are headed up in 2006.
After a few years of little movement, residential rents are expected to climb substantially, even as home prices may finally be plateauing.
"This will be a good year for landlords," says Greg Willett, vice president for research and analysis at M/PF YieldStar, a consulting firm serving the multi-housing industry. "There will be rent growth as vacancy rates come down. Landlords feel comfortable enough now to start raising rents again."
According to Willett, whose firm tracks 57 markets, rents will likely rise between 5 percent and 6 percent in 2006.
Several factors are contributing to landlord optimism, but what they all boil down to is that more Americans are being driven into the apartment market due to the increased expense of home ownership.
That was then, this is now
Home prices appreciated at an average of nearly 9 percent a year from 2001 to 2005, far surpassing increases in rents, which averaged only 2 or 3 percent a year. The soft rental market coincided with the housing boom, which drew millions of Americans into home ownership, reducing the demand for apartments.
But the hot home market is cooling off this year. David Lereah of the National Association of Realtors is predicting home price increases around 5% for 2006 – about the same amount that rents will rise.
The higher end of the rental market took an especially hard hit during the housing boom as more affluent Americans saw the value of buying real property as an investment as well as a place to live.
"There has been a big cut in the number of higher income renters" says Willett. "Many people used to be renters by choice. Now most renters are by necessity."
Those renters by necessity will probably be joined by many more over the next months. High home prices and rising interest rates mean that hundreds of thousands of potential homebuyers cannot afford to buy a single-family home or condo, according to Brad Inman, founder of Inman News Service, which covers the real estate industry.
"Not only that," he says, "but lenders are tightening up their lending criteria, leading to fewer qualified buyers."
Those who can't buy will rent.
The most expensive rental markets
Many of the places where rents are rising the fastest are in very hot housing markets. New York City is the most expensive place to rent an apartment in the United States – $2,400 a month on average (through December 31), according to Reis Client Services. New York also has seen condo prices explode.
In Manhattan, condos and co-ops average $1.3 million, and rents average $3,142 a month, according to data supplied by Citi Habitats, a New York residential broker.
M/PF YieldStar data shows tenants in many other cities also paying in the quadruple-digit range every month. The mean rent in San Francisco is $1,669, San Jose is $1,429 and Los Angeles, $1,422. Bostonians pay an average of $1,350 a month and renters in Washington, D.C. pay $1,188. All those cities have experienced substantial home price increases in the 2000s.
The fastest-rising rents in any U.S. city for the 12 months ending March 31 were in Fort Lauderdale, Florida. Rents rose 12 percent there to $1,151.
That was still considerably less than the increase in Fort Lauderdale home prices during 2005, when the median price soared 28.8 percent, according to the latest data from the Office of Federal Housing Enterprise Oversight. (First quarter statistics are not yet available from OFHEO.)
Other illustrations of rental markets lagging home prices occurred in West Palm Beach, Florida, where selling prices jumped 28.3 percent during 2005, while rents rose 12.3 percent to $1,104. West Palm rents stood at $1,107 after the first quarter of 2005, up 10.5 percent year-over-year.
Some of the most sluggish rental markets had little sale price appreciation in 2005. In Greensboro, North Carolina, where rents fell by 3.7 percent in the 12 months ended March 31, home prices rose only 4.3 percent last year.
In Raleigh, prices inched up at a slightly faster rate, 4.7 percent in 2005, but rents still declined by 2 percent through March 31.
Regionally, the lowest rents were in the Midwest, where they averaged $820. The South was a close second at $826 and the Northeast came in at $1,119. The West not only averaged the highest apartment rents, at $1,138, but rents grew 6 percent over the past 12 months, much higher than did the second-place South, where increases averaged 3.9 percent, the same as the nation as a whole.