If Fewer People are Buying, It Must Mean More People are Renting

As I have written here before, rental landlords, who used to fret as prime would-be tenants jumped into the housing market instead, suddenly are in the driver's seat. Nationally, rent for a 1,000-square-foot apartment has jumped 3.7% to $1,389 a month from $1,339 a year ago, according to data collected by Boston-based research firm Property & Portfolio Research Inc. Rent increases haven't been this high since the fall of 2001, when rents jumped by 4.1%.

A big reason for the rising rents -- and the emerging bidding wars -- is a smaller stock of apartments, caused partly by developers who built condominiums instead or converted existing apartments into condos to take advantage of the once-hot housing market. Rental vacancy rates dropped to 5.3% in the second quarter of 2006 from 6.2% in the second quarter of 2005. The vacancy rate could shrink to 5% by year end, according to Encino, Calif.-based real-estate investment brokerage Marcus & Millichap.

The boom in demand for rental apartments follows several brutal years for landlords. From 2002 to 2005, 438,000 renters from age 20 to 34 nationwide took advantage of low interest rates and became first-time homeowners, says Hessam Nadji, managing director of Marcus & Millichap's research services. Landlords offered free rent for a time and paid brokers to find them tenants.

San Francisco renters are increasingly anxious, says Abigail Glynn, a broker with San Francisco-based firm Davis Realty Co. "A lot of them run into the apartment and come running out to hand you the [rental application] papers," she says.

Rob Hielscher, a 31-year-old commercial-real-estate broker, recently moved back to San Francisco from Chicago with his girlfriend, Lisa Lombardi, a 29-year-old occupational therapist. After two trips to the Bay Area and visits to 12 apartments, they moved into a two-bedroom apartment with a private backyard in the Potrero Hill area. To Mr. Hielscher, the $2,300 monthly rent was a better deal than buying a similar unit -- which would cost nearly $900,000, or about $3,800 a month after a mortgage payment, tax savings and homeowners' fees, according to Potrero Hill real-estate broker Greg Angilly.

Condo investors going into hold mode may decide to rent their units as a way to cover costs. In markets with low apartment vacancies and increasing rents, the move is an especially attractive way to bide time.

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