Apartment Rentals Surge in U.S. on Foreclosures, Jobs

July 27 (Bloomberg) -- U.S. apartment landlords are seeing a surge in rentals as mounting foreclosures reduce homeownership and an improving job market for young adults encourages them to find their own places to live.

The number of occupied apartments increased by 215,000 in the 64 largest U.S. markets in the first half, according to MPF Research. That’s almost double the units added in all of 2009 and the most since the firm began tracking the data in 1992. The vacancy rate declined to 6.6 percent last month from 8.2 percent in December.

“Demand is pretty stunningly strong in the first half,” Greg Willett, a vice president at the Carrollton, Texas-based apartment-industry research firm, said in an interview.

Investors are betting the expanding ranks of renters will lead to earnings increases next year of about 5 percent to 10 percent or more for apartment real estate investment trusts such as Equity Residential and AvalonBay Communities Inc. UBS AG this month raised its rating on AvalonBay, Essex Property Trust Inc. and Post Properties Inc. to “neutral” from “sell.”

The change signifies a “less bearish” view on apartments, while acknowledging that “headwinds will remain,” according to the July 7 report by New York-based analysts Dustin Pizzo, Ross T. Nussbaum and Derek Bower.

“The apartment REITs have priced in the most growth within the broader REIT group and as such are most vulnerable if the economy slows and job growth does not begin to come through in a meaningful way,” they wrote.

The Bloomberg REIT Apartment Index has gained 28 percent this year, double the 14 percent advance in the broader Bloomberg REIT Index. The Standard & Poor’s Supercomposite Homebuilding Index has fallen 3.1 percent.

Job Growth

The economy’s recovery from the worst recession since the 1930s has revived hiring enough to stimulate demand for apartments. The growth hasn’t been enough to prevent more home foreclosures, which lift rental demand, or to lead to a sustained rebound in homebuying.

New jobs are the biggest driver of apartment occupancy. Employers began hiring again in January, adding an average of 147,000 jobs a month through June, according to the Labor Department. Employment for people 20 to 29 years old -- a key group for landlords -- rose in May and June on a year-over-year basis for the first time since the end of 2007.

While payroll growth has been modest compared with pre- recession levels, it may be enough to have persuaded some families sharing housing with relatives to get their own places, according to Mark Zandi, chief economist of Moody’s Analytics Inc. in West Chester, Pennsylvania.

Bunking With Brother

“Given how hard it is for families to live together for very long, they moved out as soon as they got a job or even thought they could find one,” he said in an e-mail.

Mike Odenthal moved to the New York area in January from San Diego in search of a communications job, sleeping on his younger brother’s couch in the Heights neighborhood of Jersey City, New Jersey. He moved out four months later after the condominium went up for sale, eager to live on his own and not wanting the sight of his possessions in the living room to discourage potential buyers.

“I was tired of depending on my family for housing,” said Odenthal, 27, who also stayed with his parents in Jersey City. “I can’t imagine doing that forever, and all retiring to Florida together.”

Odenthal found a roommate and moved July 1 to Manhattan’s Upper East Side, paying $700 a month for his share of the rent. The next morning he got an offer to work at a New York public relations firm.

Foreclosures Persist

Finances for homeowners didn’t improve fast enough to prevent more than 1.65 million foreclosure filings in the first half, an increase of 8 percent from the same period in 2009, RealtyTrac Inc., a data company in Irvine, California, said July 15. A record 269,962 U.S. homes were seized from delinquent owners in the second quarter as lenders set a pace to claim more than 1 million properties by the end of 2010.

The U.S. homeownership rate fell to 66.9 percent in the second quarter, the lowest since 1999, the U.S. Census Bureau said today. The rate peaked at 69.2 percent in the fourth quarter of 2004.

“As homeownership continues to decline, people need to live somewhere,” said Henry Cisneros, who was President Bill Clinton’s housing secretary from 1993 to 1997 and is executive chairman of CityView, a real estate investment firm in Los Angeles that focuses on urban projects including apartments.

Sales Decline

The rate of new-home sales last month was the second-lowest on record, behind May, following the expiration of a government tax credit for homebuyers, the Commerce Department reported yesterday. Sales of previously owned homes fell 5.1 percent in June, the National Association of Realtors said last week.

“The rental market will be robust for the next few years,” Cisneros said.

Effective rents, or what tenants pay after concessions or breaks from landlords, increased 1.4 percent in the biggest markets in the first half, according to MPF Research. Rents may rise 4 percent to 6 percent in both 2011 and 2012, compared with a gain of about 2 percent this year, Willett said.

AvalonBay, which took a nine-month hiatus from construction in 2009, said in April it had seven communities under development and would increase rents for tenants renewing in the second quarter. It raised its forecast last month for second- quarter and 2010 earnings based on “improved operating trends.”

The Arlington, Virginia-based company’s funds from operations, a widely used measure of earnings, will rise 8 percent in 2011, according to the medial estimate of 20 analysts surveyed by Bloomberg.

Equity Residential

Equity Residential, based in Chicago, has pushed rents up by “high single digits” in all of its markets since January, Chief Executive Officer David Neithercut said in a June 11 interview. Funds from operations in 2011 also will rise 8 percent, according to a survey of 22 analysts.

Landlords won’t be able to raise rents too aggressively because unemployment remains high at 9.5 percent and declines in home prices have made it no more expensive to buy than rent in about half of larger markets around the nation, Willett said.

Buy Versus Rent

In Atlanta, the median home price has fallen 37 percent to $110,100 from the peak in the third quarter of 2006, according to the National Association of Realtors. Assuming a 10 percent down payment and a 30-year mortgage at 5 percent, the monthly principal and interest cost is $532. That compares with average monthly rents of $774 in the city, Willett said.

Riverstone Residential Group of Dallas, which manages 175,000 units in 30 markets around the country, reduced average concessions to about a half-month’s rent from about two months a year ago, CEO Walt Smith said. Vacancies have fallen below 5.9 percent in buildings that aren’t newly constructed, from 8.25 percent last year. Smith said he expects significant rent growth by 2012 as supply tightens with so few new units being built.

“Landlords are cautiously testing the strength of the submarket their property is in to see if the market will withstand small rent increases,” Smith said. “In most markets, they’ve been successful.”

--With assistance from Oshrat Carmiel in New York. Editors: Larry Edelman, Kara Wetzel

To contact the reporter on this story: Prashant Gopal in New York at Pgopal2@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net