Apartment vacancies rise as more houses offered for rent

Mar 24, 2008 (The Post and Courier - McClatchy-Tribune Information Services via COMTEX) -- NO MATCHES FOUND. | news | PowerRating | PR Charts -- Stacy Jones looks around her cramped Hanahan apartment and craves breathing room.

Tighter mortgage lending standards mean she and her husband can't buy a home for themselves and their three children, ages 3, 5 and 13. But rather than renewing their lease, they are eyeing the growing number of single-family homes for rent that offer larger floor plans and expansive yards.

"My son's into baseball and football. My youngest one can look around for flowers and pick them and be busy all day, and my oldest one just wants a place to get away," Jones said.

When families like the Joneses choose to rent a detached home instead of a unit in an apartment community, it fuels what multifamily developers call a "shadow market." A slowed real estate market has made it hard for homeowners to sell, and some owners who had to leave Charleston before finding a buyer have opted to rent out their homes, recouping at least a portion of their monthly mortgage cost.

The growing shadow market in Charleston is creating uncertainty in the apartment development market. Many rental communities are offering discounts on monthly rent and application fees, and some of the more than 6,600 apartments scheduled to be built in Charleston during the next few years will likely be put on hold as multifamily developers proceed with caution.

The local apartment vacancy rate, or the percentage of unoccupied units in managed complexes, is slowly rising. The vacancy rate hit a low of 5.9 percent in August 2005 and has edged up slightly since then to about 9 percent, according to figures from Real Data, a Charlotte-based research group.

The rate isn't rising at an alarming pace, but the trend will likely have both short-term and long-term effects. And the increase doesn't match up with traditional economic thinking that suggests rental rates boom when demand shifts away from home buying.

"It would appear that way, but the numbers are just not working out," said Cathy Hontz, publisher of the Charleston Apartment Guide.

Charles Dalton of Real Data attributes the rise to slower job growth and a flood of vacant homes that are available for rent, including a large number of condominium conversion units that investors have chosen to rent out.

Renters might choose to live in a single-family home rather than a managed apartment complex as a way of getting more space and privacy. Also, individual homeowners don't have to follow federal fair housing standards, allowing them to offer creative leasing agreements. And renters who might not pass a criminal background or credit check -- a requirement for most managed apartment communities these days -- also could turn to individual properties.

A weakening national economy, which has led to slower job growth, also is hurting demand for apartments, Dalton said.

When multifamily developers weigh building a new community, they base their decision heavily on nearby job opportunities. They rely on workers who will move to the area and rent for a few months while they learn their way around the area -- and the local housing market.

"Let's say a Google or a (Boeing Dreamliner project) comes to town," explained Robert Morgan, managing director of multifamily developer Trammell Crow Residential's South Carolina division. "A lot of those folks will end up in a rental for 12 to 18 months and then buy a house. It moves people around."

A healthy number of Charleston residents are still looking to rent, in part because of fallout from the homebuying market slowdown.

Mortgage lenders have tightened their standards lately, making it hard for some first-time buyers with questionable credit to buy a house. Other potential buyers are opting for the convenience and flexibility of apartment living while they wait and see how much further home prices will fall in the Charleston area, said Steve Black, a regional director of client services for Charleston-based property management giant Greystar.

"It's a less permanent and less risky housing decision," Black said.

But the number of people who are choosing to rent in apartment communities is not enough to offset the number of new apartments coming on the market and keep the vacancy rate low.

As a result, renters now have the upper hand.

Apartment owners have increased monthly rent prices only slightly. During the first half of 2007, rents rose a modest 1.5 percent compared with a 4.5 percent jump the previous year, according to Real Data figures.

"You're starting to hit a level where it makes it difficult to raise rents," Dalton said.

Most apartment communities are now offering one month of free rent on a 12- or 13-month lease, said the Charleston Apartment Guide's Hontz, who added that she knows of about 10 complexes that have lowered their monthly rent prices.

An additional challenge faces aging apartment complexes: New construction is a big draw for renters, so older complexes have to work harder to attract new tenants.

Berkshire Property Advisors, a Boston-based private multifamily investment group that recently bought three aging apartment communities in the Charleston area, has begun updating kitchens to try to lure renters away from new construction.

"As far as the upgrades of the kitchens and bathrooms, we think we will have the nicest properties in (the West Ashley market)," said Michael Bippus, the company's vice president of acquisitions for the Southeast. "They may not be the newest, but our rents won't be as high as those newly built properties. That's our whole strategy."

Newer apartments, though, don't seem to be feeling the pinch.

The newly opened Alexan Wellborn Village community in Ladson has attracted a steady stream of renters, said Marysa Raymond, who is managing the Trammell Crow-built community through Riverstone Residential Group.

"It feels like their own home," she said of the newly built apartments. "It has all the new appliances, updated lighting, new carpet -- people love new carpet."

Alexan Wellborn hasn't had to adjust its incentives yet to attract renters. Neither has Haddon Hall at Grand Oaks, a new West Ashley condominium complex that turned apartment once the housing market slowed.

That's encouraging for the multifamily developers who are behind some of the 6,616 apartments set to be built in Charleston during the next few years. The proposed increase is ambitious, considering that about 24,000 units exist in Charleston right now.

"Not all of them will happen," predicted Randy Bates, director for Atlanta-based Wood Partners' South Carolina division. "Some make announcements even though they are not ready to build."

Lenders might decide that the market is too risky and pull their financing for some projects. Others will become long-term projects that will wait for job growth to resume and vacancy rates to steady.

"It's not 'build it and they will come," " Bates said. "But we've had great population growth, and we will continue to build where we think they will come."

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