Tuesday, April 28, 2009 | While much of the media’s attention has been devoted to how the collapse of the credit markets has impacted for sale housing, only recently has the attention turned to the impact on rental housing.
Rental housing much like other commercial real estate classes is now being impacted by our economic downturn. Commercial real estate, which includes rental housing, office buildings, retail malls, and industrial properties are all being affected by job losses and the lack of available credit.
Job Losses and Rental Housing
Demand for rental housing, ranging from single-family homes to condos to the large rental communities is driven by job growth. Over the last few years the region’s economic engine has been producing fewer and fewer jobs.
This slump in job growth slid into negative numbers in 2008, and according to the Grub and Ellis March 5, 2009 Market Insight Report we are projected to lose nearly 23,000 jobs in 2009. The same report predicts that we will likely continue to see additional job losses through 2010, but at a lower rate.
In times like these, when consumer confidence drops, people want to reduce their expenses. Reductions in housing expenses usually result in people moving to lower-priced rental units and “doubling up.”
“Doubling up” is an industry term to describe when people seek a roommate to lower their out of pocket rental expense. Additionally, we see a loss in demand due to people moving home to live with their parents or simply leaving the area.
The net result is a reduction in demand for housing pressuring landlords to offer concessions. Concessions can take the from of move-in gifts, reduced rent and security deposit reductions, or, as in the case of Orange County-based Western National Group, offering residents the ability to walk away from their lease, without damaging their credit, if they have been laid off from their job.
Depending on the length and depth of the downturn, you will also start seeing an increase in the competition for renters. In the early 1990s, it was not unusual for renters to be solicited with fliers, mailers, or in person visits from competing rental properties.
Good and Bad News for Renters
While every rental property is different — some are fully occupied, and others are actively seeking renters — I have been told that in some pockets, of the county we are starting to see fliers being placed on the cars of residents encouraging renters to move down the street to another rental community.
While this is not yet a common practice in this rental market, it’s a view of what’s to come if the economy remains on the low ebb for an extended period of time.
We are currently in a renter’s market, so the renter has the ability to seek the best deal depending on their income and desire of where they want to live. The dark lining to this silver cloud is that people’s jobs are less secure during a downturn, especially in the 18 to 35 age group which makes up a large percentage renters.
Bad News for Landlords
In a renter’s market, landlords feel the pressure to decrease rents. At the same time, local governments are feeling the same economic strain as the rest of us. As a result, they increase such costs as utilities, fees, and taxes.
What makes this downturn worse than others is that the collapse of the banking system is hampering the ability of landlords to refinance upcoming loans that are coming due or shifting to a much higher interest rate. Many will be able to get Fannie Mae or Freddie Mac’s government backed loans (80 percent of the multi-family loans available in today’s market are government backed), but at a price.
Lower rental income and increased expenses will reduce the value of the rental property, so they will need to put up more cash to offset new tougher loan requirements, if they have the capital.
Those who can’t refinance or don’t have additional capital will see their properties go into receivership or become a distress sale. These will be the opportunities for the savvy investor with ready cash.
What does all this mean? Rental income is dropping, costs are increasing, and the return on investment is plummeting — the word is survival. Real estate is a long-term investment and this economic storm will have to be ridden out. Many landlords small and large understand this, but in the last years of the highs of the economic roller coaster ride known as the 2000s, some people thought owning real estate was similar to shares of stock where you could simply buy and sell them easily. Obviously, given the large number of non-owner occupied foreclosures in the initial wave of foreclosure that wasn’t that case. Only time will tell if these new landlords, who are left, are willing or able to hold out for better days.
The good news is that in San Diego County, we are lucky that our economy is on a much firmer footing than, say, Phoenix. In Phoenix, it’s not unusual to see vacancies approaching 20 percent and owners struggling to keep their investments.
While we have seen foreclosures in our housing market, it’s happening primarily in the condo and single-family home arena. It’s unlikely that we will see this type of disruption happening on a large-scale for big rental communities like we are seeing in areas outside of California.
What Does the Future Hold?
According to UCLA Economist Christopher Thornberg, who garnered the reputation as something of a pessimist in late 2003 when he started warning about a housing bubble, things are not as bad as people think.
In a recent interview with “Apartment Finance Today,” he said that we have moved through the structural collapse of the housing meltdown. Home prices have returned to historic levels and stock prices and price-to-earning ratios for a lot of companies have reached levels that make them deals.
Consumer savings, which dropped to zero, has risen to 5 percent in the last five months. He thinks that savings levels need to get to 8 or 9 percent before we can start seeing a healing in the economy.
The biggest barrier he saw to a recovery is that we are still looking for patterns — much like the mentality that thought that because things had been great during the good times that they would continue. We are still looking for those same trend lines. Thornberg says that people should stop looking for patterns and look at fundamentals.
As for when we will see GDP growth again, he predicted early-to-mid 2010. If this prediction is accurate, and we see a turning point in the economy, at that point we can logically predict that job growth, which usually lags behind a recovery, will start occurring in early 2011.
This will signal a return to a more balanced housing market in which resident’s jobs are secure and landlords can return to calmer times.