We've written quite a few stories the past 3-4 years about the "bull market" in apartments as renting had become a choice (forced or unforced) for many in the country. [Apr 8, 2011: Apartment Vacancies Drop to 3 Year Low, as Rents Rise] [May 24, 2011: Troubled Home Market Creates Generation of Renters] A lot of money has flooded into the sector with private equity funds even buying huge buckets of property for rental. But as housing stabilizes some are wondering if the tide is finally turning back in the other direction. Certainly many of the apartment REITs have been signaling weakness of late.
It is remarkable that 30 year mortgages can now be had for 3.4% – something unthinkable even 5 years ago, and in relation to some mortgage rates in the early 80s must seem jaw dropping.
Bloomberg takes a closer look:
- Apartment occupancies rose in the third quarter at the slowest pace in more than two years as record low mortgage rates in the U.S. spur would-be renters to purchase homes instead. Multifamily vacancies fell to 4.6 percent as of Sept. 30 from 4.7 percent in the second quarter. The decline was the smallest since the apartment recovery began in early 2010, and landlords leased fewer units on a net basis than during the first and second quarters.
- “We are starting to lose renters to home purchasers,” said Matthew Gardner, principal of Seattle-based Gardner Economics LLC, a land use, real estate and economic advisory company. “As every rental project is increasing its rents and has been for a long time, ultimately it gets to the point where owning becomes cheaper than renting.”
- Low borrowing costs are making home purchases more affordable, lifting demand for both existing houses and new homes… while a shrinking supply of foreclosed homes is easing downward pressure on property prices. Federal Reserve policy makers have targeted the housing market with further accommodation measures to spur growth and reduce unemployment. That’s starting to put pressure on apartment landlords.
- Apartment owners had a net occupancy increase of about 22,600 units, down from a gain of 31,000 units in the second quarter and 36,400 units in the first. A year earlier, occupancies rose by 37,600 units, according to Reis.
- U.S. mortgage rates fell to record lows last week as the Fed resumed purchases of mortgage-backed securities. The average rate for a 30-year fixed loan fell to 3.4 percent in the week ended Sept. 27, from 3.49 percent the prior week. It was the lowest rate in data going back to 1971.
- The Bloomberg Apartment Real Estate Investment Trust Index (BBREAPT) is down almost 10 percent from its July 17 high. Since the end of 2009, the apartment REIT index has returned 78 percent including dividends, more than twice the return from hotel and office REITs.
- Apartment landlords’ asking and effective rents rose at a “marginally slower” rate in the third quarter, Reis said. Asking rents climbed 0.8 percent from the second quarter, and effective rents — how much tenants pay after such incentives as a free month — gained 0.9 percent.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog