Apartment Vacancy Rate Hits 22-Year High

By NICK TIMIRAOS The vacancy rate for U.S. apartments hit a 22-year high in the second quarter as rising unemployment reduced demand during what is usually the peak leasing season. Rents fell the fastest in markets that have shed white-collar jobs, such as New York and San Jose, Calif., and in markets where many foreclosed homes and condominiums have been turned into rental property, including Las Vegas and Orange County, Calif. Vacancy levels nationally rose to 7.5% in the April-to-June period, up from 6.1% a year earlier, according to Reis Inc., a New York real-estate research firm. Of the 79 markets tracked by Reis, 45 showed an increase in vacancies. Generally more rental units turn over during the spring and summer than in any other time of the year, which means that the declines could have an outsized impact on revenue for apartment owners. "Everybody expected spring leasing to save apartment landlords. That hasn't happened," said Victor Calanog, director of research at Reis. The housing downturn initially offered landlords the chance to lure troubled homeowners into the rental market. But the pace of job losses shattered any inroads that apartments might have gained from the housing bust. Apartment vacancies began to rise at the end of 2007 before accelerating further as the economy deteriorated last fall. Rents, meanwhile, are falling at the fastest pace in at least a decade. Effective rents, which include landlord concessions such as one month free rent, fell 1.1% in the first quarter and 0.9% in the second quarter to an average of $975 a month. The combined decline for the first half of the year was the largest since Reis began tracking the data in 1999. Effective rents were down 2.9% in San Jose, the sharpest quarterly drop, to $1,430 a month. New York City had the largest 12-month rent decline, at 5.8%, to an average of $2,680. "It is one of the worst second-quarter performances that we've seen," said Ron Johnsey, president of Axiometrics Inc., an apartment-research firm. Vacancies tend to rise during periods of high unemployment because household formation slows, as would-be renters double up or move in with family members. Those who do rent are more cost-conscious. "Do they absolutely need that extra bedroom, the balcony, or the pool view?" said Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP. Meanwhile, shadow inventory of foreclosed properties and condominiums for rent continues to compete with rental apartments in the most oversupplied housing markets. While rental demand grew by 2.1% during the first quarter, apartments didn't benefit, in part because former homeowners chose to live in vacant homes for rent, said Gleb Nechayev, senior economist at CBRE Torto Wheaton Research. There are signs that the shadow inventory may be leveling off. The number of vacant-housing units for rent declined to less than one million in the second quarter, from more than 1.1 million through most of 2008, according to Ron Witten, who runs a Dallas-based apartment-research firm. Falling home prices could hit landlords in two ways. They could force landlords to lower rents to keep up, and could spur some renters to purchase homes. Still, the number of renters who move out to purchase homes isn't expected to surpass levels seen during the housing boom earlier this decade. From 2000 to 2003, around 30% of renters who moved out of apartments were becoming home buyers, while just 15% of move-outs left to buy homes during the first quarter of 2009, AvalonBay Communities Chief Executive Bryce Blair told investors at a real-estate conference last month. Markets with better employment prospects saw modest rent growth during the second quarter. Effective rents increased in the second quarter by 0.3% in suburban Maryland and in Washington, D.C. Poorer-than-expected rental growth could push landlords who piled on debt during the years of easy credit into default on their mortgages. Write to Nick Timiraos at nick.timiraos@wsj.com