Rents to hit record, driven by occupancy
Rates expected to climb 3%, but some apartment owners can't raise prices
Northeast Ohio apartment owners have entered History City. A just-updated forecast by the Marcus & Millichap real estate brokerage estimates multifamily rents in the Cleveland market will hit a record this year. Average effective rents — actual rent payments landlords receive after concessions and discounts in negotiations — are expected to rise 3% to $725 a month in 2012 from $704 in 2011. Monthly asking rents, or advertised rates before concessions such as a month of free tenancy, are expected to increase 2.6% this year to $756 from $737 last year. The spread between asking and effective rents shows that apartment owners still need to market competitively even as regional occupancy sits at 94%.
Michael Barron, a vice president of investments at Marcus & Millichap's Independence office, said he and his colleagues specializing in apartment sales hear evidence of the rent increases from owners on a regular basis. They also see it in financial data they gather to list and evaluate for-sale apartment buildings.
“Savvy owners are taking advantage of occupancies and are raising rents as leases come up for renewal and for new tenants,” Mr. Barron said. “In the 10 years that I have done this, it's the strongest that I have seen the market in terms of a little bit of a price increase. It's still a price-sensitive market.”
However, the ability to push rents upward is uneven.
“Some owners will not experience this,” Mr. Barron said. “In areas with higher income or higher occupancy, owners can raise rents a little more than in lower-income or lower-occupancy areas. In a working class or low-income area, a $10- to $20-a-month rent increase will cause someone to move next door to get a lower rent.”
David Niederst, CEO of NM Residential in Fairview Park, said in properties he owns in Parma that rent for upwards of $400 monthly, he could not ask for an increase without risking losing tenants.
“People are still sensitive to rents,” Mr. Niederst said.
Some take utility route
Instead of hiking rents in its family-owned portfolio of more than 6,000 apartments, NM in January implemented a program to charge tenants for their sewer and water bills. That change means tenants may pay as much as $20 monthly for those utilities, which helped the company as much as a rent hike.
“Raise rents and you have to advertise a larger rent number,” Mr. Niederst said in explaining the decision to go with a sewer and water charge. “You're not advertising $625 a month. It's better at $595.”
Marcus & Millichap statistics also show the Cleveland multifamily market recovered quickly from the 2008 recession — which wasn't the case in commercial and industrial markets — and apartment rents recovered faster than in prior downturns here.
For instance, the prior high effective rent was $705 in 2008. It plunged almost 4% in 2009 to $679 monthly.
The spike in apartment occupancies and the attendant increase in rents have resulted in part from the children of baby boomers graduating from college — the so-called “echo” boom — at a time when owning a house as an investment is widely mistrusted in the wake of the housing bust.
Moreover, foreclosures and the difficulty in qualifying for new home loans under stricter credit requirements are keeping some people in apartments who otherwise would gravitate to buying houses.
Good times here to stay?
A question that will bedevil regional multifamily property owners will be how long the good times last.
Relaxed mortgage lending criteria may take the edge off current occupancies, though not to the degree that freewheeling residential lending that created the housing bust made owners suffer.
The other factor will be how much building lenders will allow apartment developers to do. Modest rents relative to other markets make typical Northeast Ohio apartment construction top out at a few hundred units a year. Mr. Barron said, based on recent chats with developers, he counts 1,000 more units under development. However, he thinks it would be several years before occupancies slip.
Ralph McGreevy, executive vice president of the Northeast Ohio Apartment Association, said owners have little choice but to hike rents when the market allows it.
“It's incumbent on them to make money when they can,” he said. “The time of high vacancy will come back at some point.”
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