Estate and mortgageApartment Rates Rise
After years of flat rents and increasing costs for apartment landlords, rents are finally increasing.
You may ask, "What is driving this sudden change?" Just twelve months ago, landlords were faced with vacancy rates of 12 to 15 percent. Rental concessions drew tenants from one property to another. The horizon looked bleak. Then the economy rebounded. People kept moving into Oregon, and vacancy rates dropped to 3 to 5 percent in the Portland Metro area.
Apartment demand has increased for the following reasons:
Apartments being purchased by condominium-converters are taking units offline
Increased immigration and job growth
Cost of construction for new units has increased, limiting the growth of new apartment construction to about 2000 units for 2007
Land seems to be available but at a high cost exceeding the $15,000 to $20,000 per unit that apartment developers might consider
Land lots for multifamily tend to be in the $30,000 to $40,000 range which works for condominiums but not for apartments
This increased demand, plus pressure on the bottom line, is nudging rental rates up.
(Note: Capitalization rates for privately-held real estate remains at historic lows. According to Mark Barry, Appraiser we are seeing CAP rates of 4 to 5 percent in the inner city and 5 to 6 percent CAP rates in the suburbs. These low CAPs are forcing owners to increase rents to cover their debt service).
Rental Forecasts
Jerry Johnson, principal with Johnson Gardner, expects rents to increase 8.5 percent in 2007 and another 6 percent in 2008. Mark Barry, a well-known local apartment appraiser, expects that rents -- especially for new tenants -- will increase from 5 to 8 percent. These increases will take one of two forms: either as straight rental increases, or as utility bill-backs.
New technology allows for not just water bill-backs via the popular Ratio Utility Bill-back System (RUBs) program, but also allows for the hot or cold water to be measured on a per unit basis and then sent via radio signals and telephone back to the home office for reading and billing back to tenants. This includes the proportionate share of the sewer and storm sewer bills.
Important statistics that affect rental rates in the Portland Vancouver Metropolitan area:
Estimates for cost of construction per unit:
Land $20,000-$40,000 per unit
Compare this to a land cost of $3,000 to $15,000 a unit in 2003 and 2004
Construction costs $75 to $100 per foot (can be up to $300 a foot in a high-rise environment)
Estimated cost for a new 2 bedroom, 800 square foot unit ranges from $80,000-$120,000 per unit depending on code and amenities.
Employment, Population, and Supply growth:
Employment grew roughly 3.82 percent from October of 2005 to October of 2006, or about 37,000 jobs
Current unemployment hovers around 5.2 percent down from 8.3 percent in 2003
Population growth was estimated at 1.9 percent in 2006. Population growth is estimated to continue at about the same rate for 2007.
There is a greater supply of houses in the marketplace. The cost of housing has increased from $246,000 for an average house in 2004, to $332,600 for an average house in 2006. Wages have not been able to keep up with this cost explosion, forcing more people into the rental pool according to RMLS.
In 2005 there was an inventory of about 6000 units per month
In 2006 the standing inventory grew close to 12,000 a month
There is currently a 3-4 month inventory of homes in the marketplace -- the highest amount since January of 2004
In summary, we are seeing a cyclical adjustment in rent rates to make up for the three years that landlords were unable to adjust their rents to maintain their operating margins. We expect to see these increases continue through 2008. Then developers should start adding more apartments to the marketplace and rents will adjust to the supply.
Note: The author thanks PGP Valuation Inc., appraisers, Mark Barry and Associates, appraisers and Johnson Gardner Associates, and economic forecasting consultants, for their help with research on this article.