Double-digit rent hikes are on the way

Jan. 13, 2011, 11:05 a.m. EST

Double-digit rent hikes are on the way

Demand builds for new apartments, but few are being built

By Steve Kerch, MarketWatch

ORLANDO, Fla. (MarketWatch) — Apartment dwellers could be facing double-digit rent increases in the coming years as a shortage of new multifamily units coupled with a rise in prime renter-age households gives landlords clout they haven’t see since the mid-1990s, development experts said Thursday.

“Demand pressures are building. It’s not bad today because rents have been down the last two years,” said William McLaughlin, an executive vice president with AvalonBay Communities (NYSE:AVB) in the Northeast.

“But it feels a lot like 1992, when we were coming out of a deep recession … and we ended up seeing double-digit rent increases after that,” he said.

Multifamily developers broke ground on just 114,000 units in the United States in 2010, a figure so low that it wouldn’t account for all the multifamily units lost last year to the wrecking ball or natural disasters, David Crowe, chief economist for the National Association of Home Builders, said at the International Builders Show here.

Although expected to grow 16% to 133,000 starts in 2011, that number, too, would leave a substantial deficit in the number of units needed to meet expected demand. “We’re way behind on the typical allocation of household formations, with people living at home, in roommate situations or staying in the school dorm,” Crowe said. “When they start bursting forward they are going to need a rental place.”

Whether those 18- to 24-year-olds will find a rental place, and whether they will be able to afford it in the coming two or three years is in question. Already there are signs the apartment market is tightening and in some cities rents are already going up 7% or 8% per year.

“I’ve never seen so much pent-up demand,” said Jay Jacobson, a partner in the Boca Raton, Fla., office of Wood Partners, a national development and investment firm.

Jacobson said his company’s portfolio of rental properties has a 96.5% occupancy rate. In Miami occupancies are running 98% and some properties are full with waiting lists. Rents have already started to climb, going up an average 4% in 2010, he said. But in some markets those increases are 7% to 8%.

“Why the demand? It’s impossible to buy a home because it’s darn near impossible to get a mortgage,” Jacobson said. “And we have this huge population in the biggest renter cohort” about to hit the market.

Even though builders can see the demographic necessity of building more rental units, the process of bringing apartments from the drawing board to completion is an arduous one.  “We’d love to build more but it is just taking longer to get in the ground with them,” McLaughlin said. “If we went in the ground today we wouldn’t deliver those units until 2012 or 2013 and if we just are looking today and find a piece of ground it could be 2015 before we could deliver.”

Financing has been a problem for multifamily developers as well. Although a publicly traded REIT such as AvalonBay can secure funding, most other developers are having to scramble to secure debt and equity financing as traditional lenders have backed off the sector. “All the tools that we have known for so many years just went away. We’ve had to get creative,” said Robert Greer, president of Marlton, N.J.-based Michaels Development, which builds affordable rental properties using low-income-housing tax credits.

“When we open a 100-unit project, with three- and four-bedroom units, we will have 800 applicants every single time, wherever we are building across the country,” he said. “Without more investors to provide equity and more capital financing it is going to be very difficult to meet that demand.”

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