April 4, 2007 / 4:04 AM / in 11 years

U.S. apartment rents rise

NEW YORK (Reuters) - The U.S. apartment market remained strong in the first quarter, and most areas did not yet show an impact from the recent mortgage crisis as rents rose and the vacancy rate was little changed, according to a real estate research report.

<p>An apartment building in New York is seen in this January 14, 2005 file photo. The U.S. apartment market remained strong in the first quarter, and most areas did not yet show an impact from the recent mortgage crisis as rents rose and the vacancy rate was little changed, according to a real estate research report. REUTERS/ Peter Morgan</p>

Effective rent, which is the rent actually paid after factoring in free rent and other incentives, rose 1 percent to an average of $939 per month, according to a Reis Inc. report released on Wednesday. Effective rent has been climbing since the second quarter of 2003.

The U.S vacancy rate rose 0.1 percentage point to 6 percent in the quarter versus the previous quarter, which had a gain of 0.4 percentage point. The report tracks 79 major U.S. markets.

Experts are looking ahead for a rise in demand for apartments from people who are no longer able to buy or who lose their homes as mortgage foreclosures rise and mortgage lending standards tighten.

But foreclosures also may swell the supply of apartments and keep down rental rates as condominiums come onto the market as rental properties.

In some markets, rental rates were already restrained in the first quarter as condominiums were reconverted to apartments and returned to the market as rentals, Reis found.

“We haven’t seen the full extent of the impact from the increase in foreclosures and the stress on subprime mortgages, and we’ll have to keep watching this very closely in the coming quarters,” said Sam Chandan, Reis chief economist.

COMPANIES, MARKETS

These trends could affect publicly traded apartment companies such as Apartment Investment and Management Co. (AIV.N), Mid-America Apartment Communities Inc. (MAA.N), UDR Inc. (UDR.N), Equity Residential (EQR.N), Archstone-Smith Trust ASN.N and AvalonBay Communities Inc. (AVB.N)

The New York area, the largest U.S. apartment market, had the lowest vacancy rate in the first quarter at 2.4 percent. Memphis, Tennessee had the highest at 11 percent.

The markets in Fairfield County, Connecticut, Salt Lake City, Utah and Dayton, Ohio experienced the greatest declines in vacancy rates, each down 0.4 percentage points.

Fairfield’s vacancy rate fell to 3 percent, Salt Lake City to 5.3 percent, and Dayton’s to 8.8 percent.

”If you look at the level of demand, it’s low compared to historic levels,“ Chandan said. ”What has allowed the vacancy rate to come down in spite of that is that we’ve faced supply constraints.

The Orlando, Florida market claimed the greatest rise in vacancies at 0.7 percentage points to 5.6 percent.

For rental rates, San Jose, Miami and Seattle had the biggest growth in effective rent at 1.6 percent each from the prior quarter. New York followed at 1.5 percent.

Colorado Springs, Colorado came last at the other end as its effective rent fell 0.2 percent.

Around the country, net conversions of apartments to condominiums stood at less than 1,000 units in the first quarter 2007, having peaked at over 55,000 units in the third quarter of 2005.

Owners and developers gradually have been constructing new apartment buildings and halting plans to build condominiums. Instead some have converted apartment buildings-turned-condos back into rental apartments.

Fort Lauderdale, Florida leads the pack of markets with the greatest reconversion activity, accounting for 0.6 percent of the total inventory of apartments in the first quarter, according to Reis.

Other formerly hot condo markets such as Phoenix, Las Vegas, Atlanta, and Austin and Fort Worth, Texas also are seeing more reconversions.

A greater supply of apartments from reconversion activity and from individual condominium unit owners who rent units that they can’t sell at a profit has begun to curb rises in rents.

In Fort Lauderdale, for example, first-quarter effective rent growth rose 0.6 percent, compared with 2.8 percent in the first quarter of 2006.

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