Valley job losses driving apartment vacancies

By Buck Wargo

Friday, Oct. 30, 2009 | 3 a.m.

A real estate research and investment firm predicts apartment vacancies will rise into 2010.

Marcus & Millichap reports that deep job losses — especially because of the downturn in the leisure and hospitality industries — have lessened the demand for apartments, especially lower-end units.

The firm predicts that because of the struggling job market, the region in 2009 and 2010 will see fewer than 10,000 new households, far fewer than were added during the boom years from 2000 to 2007.

Homes and condos for rent are competition for apartments, and with 6,600 condos under construction, that will make it even tougher for apartment owners into 2010, said John Vorsheck, Marcus & Millichap’s regional manager.

The firm projects the vacancy rate will increase from 10.7 percent in the third quarter to 12.1 percent by the end of the year, an annual increase of 4.2 percentage points. In contrast, the vacancy rate rose 1.8 percentage points in 2008.

A wave of job losses among low-wage earners has reduced the demand for lower-tier apartments by 3.5 percent in the past year to 10.6 percent, Vorsheck said.

Higher-end apartments saw vacancy rates rise nearly 1 percentage point in the third quarter to 10.8 percent, he said.

Although construction has slowed, “the considerable stock of single-family homes serving as rentals will remain a source of competition for the top-tier apartments,” Vorsheck said.

The reason is that the rents requested by owners of top-tier apartments are about $200 more a month than the mortgage payment on a median-priced home. A year ago, the mortgage payment on the same home was $340 per month more than those same apartments, Vorsheck said.

The thinning of the rental pool has prompted apartment owners to drop rents to attract tenants. During the past 12 months, rents have fallen 2.8 percent to $847 a month, Vorsheck said. With free rent and other incentives, that has effectively reduced rents 5.2 percent to $790 a month, he said.

In the high-end units, rents have fallen 2.4 percent in the past year to $970 a month, while the lower-tier units have fallen 3.2 percent to $756 a month, the firm reported.

That has caused revenues to decline 7.8 percent in the past year. Apartments are offering 25 days of free rent on average, up from 16 days a year ago, the firm reported.

By the end of the year, Vorsheck said apartment owners will seek rents of $841 a month, while incentives will effectively reduce rents to $779 a month.

Apartment construction remains tepid with 1,714 units completed in the past 12 months, down from more than 4,000 units in the previous year, Vorsheck said.

In the valley, 2,200 apartments are under construction with most expected to open in the next six months, Vorsheck said. Another 4,000 units are in the planning stages, but they won’t go forward until the economy improves, he said.