Thursday, January 21, 2010

More on Falling Apartment Rents and Rising Vacancy Rates

by Bill McBride on 1/21/2010 09:55:00 PM

Kind of a theme ...

From Carolyn Said at the San Francisco Chronicle: Rents, occupancy fall in 4th quarter

Both national and Bay Area rents have fallen steadily for the past five quarters, said apartment data specialist RealFacts of Novato.
...
Nationally, the average monthly rent was $933, down from $994 a year earlier, while the occupancy rate is 91.3 percent, compared with 92.2 percent a year ago.
...
The biggest rent declines in the Bay Area were for units that cannot accommodate roommates ... Average rents fell 9.5 percent for studios and 10.9 percent for junior one bedrooms compared with a year ago, RealFacts said.

... about 60 percent of [SoCal] properties are offering concessions, such as a first month's free for new long-term leases, or gifts of iPods or flat-screen TVs.

"Everybody's freaking out and trying to bring in people anyway they can," [Denise Castellucci, a spokeswoman for RealFacts] said.

[The worst areas were] ... Phoenix, where fourth-quarter rents were down 8.7 percent compared with the prior quarter; Las Vegas, down 8.2 percent; Salt Lake City, down 7.3 percent; and Denver, down 6.1 percent.
Oh no, everyone is freaking out!

Note that the rent declines do not include concessions, so effective rents have fallen even further.

This is good news for renters, but this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks - and more bank failures.

And falling rents are already pushing down owners' equivalent rent (OER). OER has declined since August 2009, and will probably continue to decline throughout 2010. Since OER is the largest component of CPI, this will apply downward pressure on CPI all year. And lower rents will also put pressure on house prices, since renting is a competing product.