Hope on the Horizon

(November/2009) … As 2009 wound down, rental property owners found themselves in a particularly rough rental market as vacancy rates had risen and rents had fallen. But, rejoice: the worst is over. Just as I predicted that rents would peak in 2008, I am predicting that we have gone through the worst of the pain inflicted by this rental slump. The recovery in the rental market will begin shortly but it will not feel like much of one; rents will continue falling through 2010, just not as much as in 2009.

In fact, rents may not begin going up again until well into 2011. So why is it good news that the worst of the rental downturn is behind us? It’s only a matter of time now before the rental market goes up again.

Job growth is the key. Job growth drives rent growth. When job growth on both sides of the bay goes negative, like it did in late 2008, our rents go down. When job growth turned positive on both sides of the bay in 2005, rents went up again after a three-year post-dot-com slump. Through all of 2009, job growth has been plunging deeper and deeper into negative territory, but now the numbers have bottomed out and, in some areas, even turned up.

The last time that happened was in 2002, when negative job growth was at its worst and started to turn back upwards. Many of you will remember that period as the worst of the rental market downturn. That is the period we are going through right now, with the biggest drop in rents. Job growth and rent growth were at their worst in 2002 and in 2005 both job growth and rent growth finally went back into positive territory. Between 2002 and 2005 the rental market slowly improved. That is the phase we are now entering, but getting through the worst of the rental market as we transition into 2010 will capture most of our attention.

The RHANAC market conditions committee is preparing to send out its annual rent survey questionnaire and the results will be announced at our annual trade show in March 2010. Just based on what owners are asking for rents today, compared to what they were getting last year, I would have to guess that rents in our area have gone down about 10% to 15%.

This article is being written several weeks before Thanksgiving 2009 and it is a time when landlords with vacant apartments are getting quite uneasy, as they know that if they do not rent them now they may sit vacant through the holiday season. It is not generally a time when the phone is ringing off the hook from tenants looking for apartments anyway, but it seems like the phone has stopped ringing completely for many landlords.

My own personal experience is mixed. My smaller Oakland properties are hanging in there with no vacancies; the midsize buildings are stable but asking rents have dropped 10% to 15%; and the larger high-end property has the highest vacancy factor in the last three years, as tenants we leased to a year ago at high rents moved out to get lower rents. For us, it is the classic question, do we lower rents or give concessions such as free rent, or do we just wait for the right tenant and the right rent?