Apartment market set to rebound as home sales cool
The housing boom of the last several years has created a positive ripple effect throughout the economy. But not everyone prospered, and signs of a cooling housing market may be a good sign for owners of rental properties.
Low interest rates and the wave of rising home values turned many renters into homebuyers recently. Rental rates languished and landlords were forced to offer incentives and lower their approval standards.
Renting on the rise
Vacancy rates for apartment units in Clark County are beginning to reach normal levels. Charles Kleier, executive vice president at NAI Norris Beggs and Simpson, said vacancy rates stand at about 6.5 percent right now, versus the 7 percent to 8 percent the market has seen in the past several years. He expects vacancy rates will continue to trend down.
Kleier said the rapid appreciation of home prices in the last 18 months and interest rates inching up are creating barriers to entry for first-time homebuyers.
“The third and fourth quarters (of 2005) were the first time we saw sustained absorption,” Kleier said of the apartment market.
Nationally, rental vacancy rates for the third quarter of 2005 were 9.9 percent, down from 10.1 percent a year earlier, according to the U.S. Department of Commerce. Vacancy rates for apartment units hit a record high of 12 percent in the second quarter of 2004.
Eric Johnson, property manager for Key Property Services, said, “Rent concessions crept up to places we had not seen them before,” as vacancy rates peaked at 8 or 9 percent locally.
Typical concessions included two weeks free rent with a six-month lease and up to a full free month with a year-long lease, said Kleier. Carmen Villarma, president of The Management Group, said most new tenants can expect a free month’s rent or concessions of an amount equal to that. For the month of December, Villarama reported The Management Group’s properties had a 4.8 percent vacancy rate.
With vacancy rates closer to the historical 5 to 6 percent range, Johnson expects concessions to be cut in half in 2006.
“The market is stronger now than it has been over the past several years,” said Johnson.
Not everyone is as optimistic about the market.
Construction is cause for concern
Blain Cowley is the vice president of the Clark County Rental Association, which represents 480 members controlling 12,000 rental units. Cowley agrees interest rates will push more people into rentals, but he isn’t convinced it is enough to pick up vacancy rates. Apartment owners have had to offer free rent, waive application fees and lower acceptance standards, such as allowing smoking, pets and residents with poor credit, “just to get a warm body in,” said Cowley, who owns five small complexes. The result, he said, is lowered income and residents who cause problems.
“There is not a lot of money being made now,” said Cowley.
The problem, he said, is new apartment construction.
“Vacancy rates are higher now due to overbuilding,” he said. “And there (are more units) coming on all the time.”
Kleier said there has not been a substantial amount of building, but in a softer market, any building is classified as overbuilding. He said construction of apartment complexes has been at 60 to 75 percent of the historical average in the past three years.
“There shouldn’t have been any construction until there was a correction,” he said.
Johnson agrees there are some soft spots in the market. Downtown saw an overlapping of construction when about 700 units in Esther Short Commons, Vancouvercenter and Plum Meadows came on at the same time. But Johnson notes they are all full now.
Kleier said there are few projects on the market now and he doesn’t expect there to be a rush into it.
One significant Vancouver apartment project is the Mission Hills complex on Northeast 18th Street near Northeast 112th Avenue. The first phase of the build-out is near completion and includes 267 units. Villarma said about 30 tenants have already moved in. When complete, the nearly 580-unit complex will be the largest in Clark County. Build-out is planned as the market demands.
Buying into rentals
Despite the soft market and, said Kleier, “no true rent growth or increase to income on rental properties from 2001,” interest by investors in Clark County’s apartment market has remained high.
Appreciation in the value of properties remained attractive, but Villarma said property taxes and utility costs “have escalated an incredible amount.”
Kleier said he can easily generate six offers on an apartment property in two to four weeks, which he said shows high demand.
Johnson agrees investors are looking in the area, but they are not finding what they are looking for.
“People are holding onto what they have,” said Johnson. “(Property owners) are waiting for the bubble to back off. We will see more activity as the market rebounds.”
Johnson said signs point to an improving 2006.
“The rental market looks set to move again,” said Johnson. “It really looks promising for existing properties right now.”
Can’t beat ’em?
Property owners are joining the condo conversion trend
By converting apartments into condominiums, some developers are leaving the soft apartment market behind and presenting a more affordable option for homebuyers.
“Condo conversion is a significant trend,” said Blain Cowley, vice president of the Clark County Rental Association. “Newer high-end apartments are being converted because they aren’t rented.”
According to the Washington Center for Real Estate Research, there are more than 22,000 apartment units in the county. NAI Norris Beggs and Simpson EVP Charles Kleier expects 1 to 2 percent of apartments in the market to be converted to condos.
Clark County already has seen several apartment complexes converted to condos.
Johnson said Key Property Services completed the sale of its Waters Edge apartments in 2003. He expects the trend to continue, as many apartments are built with the intention of selling them as condos in the future.
President Carmen Villarma said The Management Group is set to begin converting two Clark County complexes with a total of 110 units to condos in February. Prices will range from $109,000 to $184,900, she said. Compared with the county’s median home price nearing $240,000, up more than 20 percent versus a year ago, condos present an affordable option for homebuyers and developers alike.