Apartment rents are this week’s news

Implications: Apartment rents are up throughout the country, sometimes considerably. The western U.S. has current occupancies of over 90% in the major markets. The weakest areas are where you might expect in Phoenix, Tucson, California’s Inland Empire and Sacramento. The combination here of relatively low wage structures for service workers, consumer budget pressures and a high inventory of single family now for rent in lieu of a market to sell combine to pressure landlords more than in say Denver, Salt Lake City and California’s Coastal areas both north and south.

Analysis:

As you know, I am based in the Phoenix area. I’ve traveled in the last thirty days to California’s Orange County, Los Angeles County and Inland Empire, and through the entire length of California’s Central Valley as far north as Sacramento. In the last 90 days I’ve also spent time in Tucson and Las Vegas. I’m struck by the relief given landlords of Class B & C apartment communities by the rent hikes. In this nickel and dime business where the bottom line is sometimes hard to come by, you can almost hear the bones of landlords relax as the increased rents provide the financing to at least cosmetically upgrade the properties both inside the units and on the exterior elevations. I’m mostly speaking of the sunny climes here where the fadeout of paint and the effect of heat on soft components like roofs can quickly degrade the property and thus the quality of tenant. There has been tremendous investment in the western rental stock recently and the results show in community after community.

That’s good because the end of the easy money may be over. Not only is the general trend worldwide leading to a decline of wealth in the industrialized countries including the U.S., but the lower levels of society are affected disproportionately as to distribution of the money. It’s clear in Phoenix, for instance, that the lower level jobs in customer service are not as abundant if higher paying. No doubt those receiving the higher pay are skilled at multi-tasking and meet the definition of fast paced. Read higher turnover into those phrases which leads to higher turnover in apartments. Nationwide, we are entering a slower economic period where an unforeseen stimulus approximating the effect of the dot-com economy of the late 90’s and the housing boom is being sought. Whether this will be provided by alternative fuels, bio-tech or nano-tech among others has yet to be seen.

Look for nagging vacancy ratio issues prompted by high turnover in the lower strata wage sectors and a moderation of rent increases. In Phoenix, rents have escalated by my observation about 25 to 30 % in the median range over the last three years. Orange County, California has seen rents double in the B & C properties in the last ten years, a compound increase of 7 % annually. You might expect the rental stock in the Inland Empire and Sacramento to experience flat rents in the next two or three years. In general, increasing rents in the next two or three in the western U. S. may not be like picking the low hanging fruit in the last two or three years. Landlords and managers will be back to work stretching the expense dollar to keep the cash flow up in the coming period.