Real estate bubble?
Source Eugene Coyle
Date 03/11/30/15:39

          November 29, 2003

    Apartment Glut Forces Owners to Cut Rents in Much of U.S.


EMPHIS, Nov. 25 -- Renting an apartment in much of the country these
days can feel a little like waking up on your birthday.

Waiting for the tenants in some building lobbies around Memphis every
morning are free cups of Starbucks

coffee. In the Atlanta suburbs, people who move into one garden-style
apartment building receive $500 gift certificates to Best Buy
the electronics chain. In Cleveland, Denver and many other cities,
landlords have been giving new tenants gifts worth $1,000 or more: one,
two or even three months of rent-free living.

While rents have continued to rise in many big cities on the coasts,
including New York and Los Angeles, they are falling in more than 80
percent of metropolitan areas across the country. Low interest rates in
recent years have persuaded many families to move out of rented
apartments and buy their first homes at the same time that developers
have been putting up thousands of new rental buildings, leaving many
landlords desperate to fill apartments.

The portion of apartments sitting vacant this summer rose to 9.9
percent, the highest level since the Census Bureau began keeping
statistics in 1956.

"I've been doing this for 30 years, and this is the worst rental climate
I've ever seen," said Leonard Richman, president of the Sunshine
Corporation, which manages almost 4,000 apartments in Memphis. "Rents
have gone down to where they were about three or four years ago."

The rent decreases and the enticements, which have proliferated in the
last year, are helping many younger adults, who are more likely to rent
than other groups and who have suffered in the hiring slump of the last
three years. Between late 2001 and this summer, the average rent per
square foot fell 4.8 percent across the country, according to the
National Real Estate Index, which is published by Global Real Analytics,
a research company.

But the declines are also a worrisome sign that the nation's housing
market has begun to suffer from some of the same problems of oversupply
that have already hurt manufacturers, economists say. If mortgage rates
continue increasing, as is widely expected, people who might have bought
houses will instead rent. That could shift the burden of the excess
supply from landlords onto homeowners, hastening the end of a decade of
rapidly rising house prices.

"You're going to take the one bright light in the economy, and it will
dim," said Mark Zandi, chief economist of, a research
company. "It's just a question of how much."

The biggest rent declines have occurred mostly in cities, like Memphis,
where land is abundant but building regulations are not and where
housing costs were already among the least expensive of the country's
urban areas.

"In any city in the Southeast or Midwest, you'll drive around and see
banners -- `One month off,' `Two months off,' `$2,000 off,' " said Mark
Fogelman, president of Fogelman Management, which manages 16,000
apartments from Kansas to Florida.

Last month, Andrew H. Underwood, a 24-year-old employee of a local bank,
moved into a high-ceilinged one-bedroom apartment in downtown Memphis
with a view from the balcony of center field at the new minor-league
ballpark across the street. He signed a 13-month lease, and though the
apartment was listed at almost $1,000 a month, he will pay only 10
months of rent.

"It seems like everyone I talk to in the building got in on a special,"
Mr. Underwood said.

Buildings in less trendy neighborhoods here are resorting to frills as
well as discounts. In some of Fogelman Management's buildings, employees
now walk the dogs of residents who are on vacation, pick up and drop off
dry cleaning, maintain free fax and Internet service and set out
newspapers and Starbucks coffee each morning. The company also takes $25
to $50 off the monthly rent of residents who carry baskets of muffins,
Fogelman coffee mugs and advertising fliers to their workplaces.

"The options are pretty much endless here," said Jenny Dail, 28, who
next month will move into a brick-and-wood duplex with her husband and
10-month-old daughter. At $725 a month, the duplex is larger and less
expensive than their current apartment in Memphis, and they did not even
have to sign a lease, leaving them free to buy a house at any point if
they choose.

In many cities on the coasts, where new construction is more difficult
and where an influx of highly educated people over the last two decades
has driven up home prices, rents have held up better. The average rent
in both Los Angeles and New York has risen about 4 percent since last
year, according to Torto Wheaton Research. Rents in Boston and
Washington have declined only slightly.

That has widened the growing gap between the cost of living in the
Northeast or parts of California and the cost of living almost anywhere
else. Three years ago, for example, a typical 800-square-foot
one-bedroom apartment in Los Angeles cost the same as a
1,480-square-foot two-bedroom in Charlotte, N.C.; today, the Los Angeles
apartment costs almost as much as 1,900 square feet in Charlotte,
according to

The one exception is the San Francisco Bay Area, where rents have fallen
more than 20 percent over the last three years, more than anywhere else.
Although homes remain expensive there, the collapse of the technology
sector since 2000 has greatly reduced the number of Northern
Californians in their 20's and 30's who are looking to rent expensive
apartments, economists say.

Landlords around the country blame three main forces for the drop in
rents. The long economic slowdown has left many people out of work or
with less income, forcing some to move in with relatives or find roommates.

The supply of apartments has also spiked, as the coming bulge in college
graduates -- the children of baby boomers -- has persuaded many
developers that new buildings will soon find tenants. Meanwhile, cities
across the country have spruced up their downtowns and converted
abandoned office buildings, like Memphis's old cotton warehouses, into
loft-style apartments.

But the biggest drag on rents, developers say, is the sharp increase in
the number of Americans who own their homes. Low interest rates have
played a big role in that increase, but so has the willingness of many
banks and the giant mortgage lenders, Fannie Mae

and Freddie Mac
to accept little or no down payment from families who once would have
been renters.

"Our rents have really had to come down to meet the competition," said
Bruce W. Duncan, chief executive of Equity Residential
a real estate investment trust that owns buildings across the country.

Bowden Homes, a Memphis home-building company, recently mailed a flier
to some renters that included a cartoon of a monster wearing a hat with
"Landlord" printed on it. "Stop Feeding the Rent Monster!" the flier
read. "For Only $726 a Month You Can Own Your Own Home!"

On the east side of Memphis, former cornfields are now filled with
subdivisions where homes cost less than $150,000. Many of them advertise
monthly mortgage payments of about $750, and some require no down
payment. Housing analysts say that offers like these have caused a spike
in home foreclosures, because some new owners have lacked the financial
cushion to withstand a job loss, illness or divorce and still make their
mortgage payments.

Despite the declines in rent, the prices of apartment buildings have
actually increased in the last few years, as many investors have decided
that real estate investments are a better bet than the stock market.
"That's the only reason a lot of folks are surviving," Mr. Richman said
of building owners.

Rents in some cities could stop their decline soon, especially if the
economy continues to gain strength, apartment owners and economists say.
But few analysts say they expect rents to start rising, or the free
coffee to stop flowing, anytime soon.

"We don't see recovery until 2005," said Gleb Nechayev, an economist at
Torto Wheaton, which is owned by C. B. Richard Ellis, the big real
estate company. "There is just too much construction. There are too many
units coming onto the market."

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