Apartment market gutted by too easy money:
January 23rd 2004
RENEWED SOFTNESS IN APARTMENT MARKETS
Apartment occupancy rates throughout many markets in the Western United States declined in the fourth quarter of 2003, dampening hopes that increases seen in the third quarter signaled an imminent turnaround. The results of our latest survey, which was carried out in December, found that occupancy levels declined in 17 of 25 major Western markets. The downturn in occupancy levels is sure to disappoint investors hoping for rent growth as most analysts agree strong occupancy must come before any significant rent increases can follow. With occupancy levels generally declining and rents flat, the apartment market remains soft.
Only in Las Vegas and Tulsa did occupancy levels increase by more than one percent, in both cases rising 1.2% during the fourth quarter. Dallas/Ft. Worth, Denver, Portland, Sacramento, Salt Lake City, San Antonio and San Diego all experienced declines in occupancy greater than one percent. During the same period rents were generally stagnant, declining slightly in 12 markets, rising slightly in 10 and remaining the same in three. The only two markets to experience quarterly rent gains in excess of one percent were the Inland Empire and Oklahoma City, with increases of 1.4% and 1.5% respectively. Two California markets remained at opposite ends of the rent growth spectrum. While San Jose had both the greatest quarterly rent decline (1.2%) and year-over-year rent decline (6.4%), the Inland Empire had the greatest quarterly rent increase (1.4%) and year-over-year increase (6.4%).
The greatest fourth quarter declines in occupancy were in San Antonio, 2.0%; Sacramento, 1.9%; Portland, 1.8%; Denver, 1.7%; Salt Lake City, 1.5%; San Diego, 1.2%; Dallas/Ft. Worth, 1.1% and Reno, 1.0%. Fourth quarter occupancy levels decreased in 12 of the 16 markets that had prior third quarter increases of at least 1.0% and in seven of the eight with third quarter increases in excess of 1.5%. Only Boise, San Francisco, Las Vegas and Los Angeles finished the year with two successive quarters of occupancy growth.
One encouraging sign was that occupancy levels were above 95% in six markets—the Inland Empire, Los Angeles, Orange, San Diego, San Francisco and Las Vegas—up from just four markets last quarter and two the quarter before that. Oakland was close behind with a stable unchanged two-quarter occupancy level of 94.9%.
Declining occupancy levels negatively impact rent growth. During the fourth quarter, rents declined in 12 markets—Austin, Boise, Colorado Springs, Dallas/Ft. Worth, Denver, Oakland, Portland, San Antonio, San Francisco, San Jose, Seattle and Tulsa. The largest quarterly rent declines were in San Jose, 1.2%; San Francisco, 0.6%; Colorado Springs, 0.6%; Oakland, 0.5%; and Seattle, 0.5%. Over the course of the year, the greatest rent declines were in San Jose, 6.4%; San Francisco, 4.8%; San Antonio, 4.5%; Austin 4.2%; Dallas/Ft. Worth, 3.5%; Tulsa, 3.5%; Oakland, 1.9%; Portland, 1.9%; Houston, 1.3%; and Salt Lake City, 1.2%.
The only two markets with fourth quarter rent gains above one percent were the Inland Empire at 1.4% and Oklahoma City at 1.5%. (Oklahoma City's rent gains, however, were offset by a nearly one percent quarterly decrease in occupancy.) Other markets with fourth quarter rent growth were San Diego, 0.9%; Reno, 0.7%; Orange, 0.6%; Albuquerque, 0.5%; Las Vegas, 0.3%; Los Angeles, 0.3%; Sacramento, 0.2%; and Tucson, 0.2%. The largest rent increases over the year were in the Inland Empire, 6.4%; San Diego, 4.0%; Los Angeles, 3.9%; Orange, 3.3%; Sacramento, 2.9%; Colorado Springs, 2.4%; Oklahoma City, 2.3%; Las Vegas, 1.9%; Albuquerque, 1.4%; and Reno, 1.3%.
As property managers struggle to increase occupancy and maintain asking rents, lessees are offered an array of concessions such as lease-signing bonuses; free weeks and months rent; and added amenities such as washers, dryers and free parking. In the hardest hit rental markets— such as those of Texas and northern California—many property managers offer potential tenants both reductions in asking rents as well as significant concessions that lower effective rents. In the Dallas/Ft. Worth market, for example, while asking rents declined 3.5% over the year, concessions reduced effective rents in some apartment complexes by as much as 20%.
Although occupancy rates slipped in many markets during the fourth quarter, in most markets rents were relatively stable. Rent declines, where they occurred, were modest. Even in San Jose, the only market to experience a fourth quarter decline in rents of more than one percent, the rate of decline was significantly less than that of a year ago. While rents have yet to rebound in most markets, the worst seems to have passed. Still, occupancy levels will need to improve in most markets for there to be the constricted supply and excess demand conditions necessary for sustainable rent growth.
William Ktsanes
RealFacts |
