Renters' market: Prices fall 3%, vacancies up 8%

NEW YORK (CNNMoney.com) -- There haven't been this many vacant rental apartments for at least 30 years, according to a new industry report.

The national apartment vacancy rate rose to 8% in the last three months of 2009, according to Reis Inc., a commercial real estate information provider. That is the highest level Reis has ever reported.

The vacancy rate barely inched up from the third quarter -- just 7.9% to 8% -- but it rose significantly from a year ago, when it stood at 6.7%. Even more dramatic, vacancies spiked 45% from the third quarter of 2006, when they had bottomed out at 5.5%.

The main culprit is, of course, the recession, according to Reis economist Ryan Severino. Not only do people lose their jobs during downturns, many others are afraid of being laid off. And they all feel pressure to reduce their housing costs.

"Household formation rates slow down during recessions," said Severino. "They may move in with their families or rent larger apartments and partner up with friends. They partner with others much more then they do during more prosperous times."

And that, of course, frees up many rental units.

All those extra apartments gave renters more negotiating room with landlords. The national average effective rent -- what landlords actually charge, not what they ask for -- fell 3% from the end of 2008 and 0.7% from the previous quarter.

Occupancy rates did climb during the quarter, with nearly 10,000 more apartments being rented than had been three months earlier, according to the report. But vacancy rates still managed to climb because 28,000 newly constructed units hit the market. A total of 120,000 new apartments came online during 2009, the most since 2003.

It's unclear why so many units were added during a time of deep economic turmoil, but some of the big rental buildings were undoubtedly planned and under development before the recession hit, according to Severino. And it would have made no economic sense to withhold them from the market. Some rent is better than no rent.

Other apartments, however, could have been planned as condominium developments and only converted to rentals after the condo market crashed. These homes are what economists like to call fungible, easily converted from one commodity into another.

The number of rental units that started out as condos is "very hard to pin down," said Severino, but there were undoubtedly some, especially in really hard hit condo markets such as southern Florida.