Landlords Not Reveling In Real Estate Boom

The Wall Street Journal reports that over the past five years, the real estate boom in Florida and across the nation has been very good to property owners of all types, with one notable exception: landlords.

They have taken a beating as historically low Florida home loan rates and the prospect of rising home prices have turned thousands of would-be renters into buyers. Meanwhile, vacant apartments have often stayed that way until landlords reluctantly lower the unit’s rent out of necessity.

“In some cases we were giving away $50 to $100 in rent to keep people coming in the door,” said Warren Rose, whose family business, Edward Rose & Sons, owns 52,000 apartments in mostly small- and medium-sized cities around the country.

After five years of meteoric growth, the market is now slowly changing, with vacancy rates dropping and rents beginning their ascent in many parts of the country. Rose’s apartments in Virginia and the Midwest began seeing increased tenancy in the past 18 months, and lately he has been able to reduce concessions to potential renters while enjoying modest occupancy growth.

“It appears that a recovery is happening,” Rose said. “But time will tell.”

Landlords in Florida and across the U.S. are pinning their hopes on continued job growth and the end of the single-family housing surge in 2006. However, a weak market could hurt them yet again if unsold condos resurface in the market as a glut of rentals.

The national apartment vacancy rate fell to 5.8 percent in the third quarter of 2005, the lowest point since 2002, according to REIS Inc., a New York-based real estate research company. By the same token, actual rents collected by landlords increased 1.2 percent over the previous quarter to $895, the highest quarterly gain since early 2001.

United Dominion Realty Trust, Inc., a large apartment investment trust, thinks fundamentals are improving at its apartments in core markets such as Washington and Southern California, and more recently in its softer markets like Denver and Seattle. In 2002, the firm spent approximately $1,000 on discounted rent and bonuses to employees for each new tenant it got to sign a lease. Today it spends $350 and is nearing the 95 percent occupancy rate that companies pine for.

The company’s CEO, Thomas Toomey, expects to see more prospective renters because of higher mortgage rates and home prices. Last year, 25-30 percent of individuals who moved out of his apartments bought homes, whereas in the third quarter of this year, that number has decreased to a more moderate 15 percent.

One of landlords’ few bright spots during the downturn was that they could sell their buildings to people doing condo conversions - especially in markets such as South Florida - at very high prices. Apartments being turned into condos sold for an average of $166,000 last quarter, up from just $99,000 for units in buildings that were sold but remained as rentals, according to Real Capital Analytics, a New York-based real estate research and consulting firm.

Landlords currently have a window of opportunity to take advantage of extremely high home prices by offering affordable rents, especially in cities. Analysts say the relationship between rents and home prices has been out of synch since the job market took a dive in 2001, yet people flocked to buy single family homes at the same time because of historically low mortgage rates. The result is that in many cities, it is cheaper to rent than buy.

• In San Francisco, it costs 58 percent less to rent than to own, compared to 33% in 2001.
• In Washington, D.C., is costs 48 percent less to rent than to own, compared to 18% in 2001.
• In Denver, it costs 41 percent less to rent than to own, compared to 35% in 2001.

These home ownership costs are based on a 15 percent down payment by the buyer. They are also based on a conventional mortgage (standard, fixed-rate, 30-years) and do not take into account property taxes or insurance. Here in Florida, it remains to be seen whether rising home prices will slow enough impact the buying and renting trends that have surfaced in recent years. Keep your eyes peeled for a good deal if you are looking to buy, because despite the recent dropoff, there will still be opportunities to buy Florida real estate and profit from doing so. Proceed cautiously, though, as renting is often the safer bet. Consider all your options.