Condos Hot While Rental Market Warming Up
Today’s red hot condominium market may be all the talk among the nation’s multifamily home builders, but rental properties are poised for a gradual comeback, according to economists speaking at NAHB’s Pillars of the Industry Conference in Miami on April 3-6. Market-rate rental apartments are beginning to fill up faster and command higher rents, the housing analysts said, as the high cost of for-sale housing and rising mortgage interest rates take some of the urgency out of the home buying stampede that has lured away many prospective renters over the past few years. Employment growth is also continuing, another plus on the demand side for rentals. The strong condo market is also helping to close up supply imbalances on the rental side. With land and construction prices soaring in the frothiest markets, condominium building and conversions are far more financially feasible than rentals, the conference speakers said. They did, however, caution developers about watching the condo market closely, because it may be only a matter of time before it starts to cool. “Single-family housing has been a huge competitor with rental, but that is changing,” said Ron Witten, president of Witten Advisors, which tracks development and acquisition opportunities in the nation’s 42 top apartment markets. Single-family home prices have been rising rapidly, averaging 11% from the fourth quarter of 2003 to the fourth quarter of 2004, but have been galloping along at an even faster annual pace — in the 20%-30% range — in some markets, especially in California and on the East Coast. Rents, on the other hand, have been flat until fairly recently. As a result, home buyers are now paying a significant premium to own over renting, Witten said, a decisive factor for households who are finding themselves priced out of for-sale opportunities. The affordability index of the National Association of Realtors® has been “riding high” despite dramatic price increases because of low interest rates, said NAHB Chief Economist David Seiders, but that index should now start losing ground, especially for first-time buyers. Mortgage rates, currently in the 6.0% range, should climb to 6.5%-6.6% by the end of this year, Seiders predicted, and 7% in the latter part of 2006. On the condo side of the multifamily housing industry, there is a scarcity of useful data on inventories, Witten said, but “for the moment, the news is all good.” The condo share of the market has been moving up, with 125,000 condo starts accounting for 36% of production last year. By comparison, market-rate rentals were down 25% to 140,000 units, he said. In addition, according to Real Capital Analytics, 60,000 rental units were purchased last year for conversion to condominiums. Seiders calculated that there are now 375,000 units in buildings with five units or more in the pipeline, with all of the upward movement attributable to condos. Completions, which have been running at about 350,000 units annually, may be up some this year, again because of the surge in condos. “Supply and demand issues with condos are possible,” he advised. On the rental side, Seiders forecast “a movement from weak markets with high vacancy rates to strong markets with low vacancies.” The absorption rate of new apartments within three months, which had been on the decline since 2000, has now stabilized at about 60%, he said, but they are still not being “gobbled up the way they were in the mid-90s,” when the rate was 75%. Witten predicted that this year should see the growth of 300,000 renter households, up from 275,000 last year, and that the market for Class A and B rentals should continue to move towards equilibrium, which occurs at about a 95% occupancy level. Witten said that Las Vegas, Los Angeles and Riverside-San Bernardino, Calif., would be the best lease-up markets for multifamily developers this year. Austin, Texas; Orlando, Fla.; and Seattle are expected to be the three strongest markets for acquisitions, with at least a 4% return during the first year of ownership. | 
