Landlords Limit Freebies as U.S. Apartment Vacancy Falls to 6%

Rent increases replaced landlord giveaways as U.S. apartment vacancies dropped in the second quarter to the lowest in more than three years, bolstered by rising demand on the West Coast, according to Reis Inc.

The apartment vacancy rate fell to 6 percent in the three months ended June 30 from 6.2 percent in the first quarter and 7.8 percent a year earlier, the New York-based property research firm said in a report today.

The second-quarter rate matched the first three months of 2008 and was the lowest since 5.7 percent at the end of 2007, the year commercial real estate prices peaked. Rents rose in all but two of the cities Reis tracks.

“The ongoing recovery and tightening vacancies continue to generate greater pricing power on the part of landlords,” Ryan Severino, an economist at Reis, said in the report. “Vacancies should continue to decline while rents rise at an even faster pace than we observed in the first half.

”Demand for rental apartments in the U.S. has soared as foreclosures forced people out of their homes and prospective homebuyers found it harder to get mortgages. The home ownership rate in the U.S. fell to 66.4 percent in the first quarter, the lowest since 1998, according to the U.S. Census Bureau.

“There’s still a stigma to buying houses,” said Stan Harrelson, chief executive officer of Pinnacle, a Seattle-based company that manages more than $17 billion of apartments and other commercial properties. “Even with job growth, people aren’t ready to take that step.

”Landlords had a net increase in occupied space of about 33,000 units in the second quarter, down from 45,000 units in the first quarter, Reis said.

$997 a Month

Effective rents, or what tenants actually pay after perks such as a free month, climbed in 80 of the 82 metropolitan areas surveyed, to an average $997 a month from $974 a year earlier and $991 in the first quarter.

The national rent increases mark a reversal from early last year, when many landlords were offering gifts to attract tenants. Aspira, a 325-unit luxury apartment building in Seattle, gave away dozens of iPads and 40-inch televisions, preloaded credit cards worth $1,000 each and up to three months of free rent when it opened in January 2010. With occupancy surpassing 80 percent, such enticements are no longer needed.

Incentives ‘Gone’“They’re gone,” said John Schwartz, director of the Northwest regional office for Keller CMS Inc., the Los Angeles- based project manager that oversaw the development of the 37- story Aspira.Shane Lynch, a software developer in Microsoft Corp.’s Xbox gaming division, said he plans to renew his lease, at the Neptune apartments in Seattle’s high-tech South Lake Union district, even though the rent for his one-bedroom unit is going up 11 percent to $1,300 a month.

‘Everyone’s Increasing’

“I’ve been looking around and it seems like everyone’s increasing that amount,” said Lynch, who moved to Seattle about a year ago from the Baltimore area to take the job with Microsoft. “I’m not seeing anything cheaper, and there’s also the cost of moving.”

Lynch, 26, said he plans to consider buying a house after he gets to know the city better.

“Because I’m so new to Seattle, I don’t want to be tied down to a certain neighborhood, but if rents continue to increase and get closer to mortgage prices, it will be kind of silly not to buy,” he said.

Article written by Hui-yong Yu for Bloomberg Businessweek.
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