Goodbye, renters market: Rents grow as demand increases (© Bartomeu Amengual/age fotostock)

© Bartomeu Amengual/age fotostock

The good times are over for renters. At the start of the housing bubble, the rental market stumbled as landlords were forced to cut rents to hold onto existing renters and attract new ones. Many landlords offered concessions and discounts to fill their units. Now rents are on the rise again — not because the economy is improving but because it remains stagnant.

It's a classic example of supply and demand. As Americans have lost their homes or continue to put off buying a home, there are more renters than ever. With inventory constrained, landlords increased rents. In 2010, rents nationwide increased an average of 4.2%. In 2009, by contrast, landlords offered greater discounts to attract tenants, and effective rents fell 5.9%. According to Axiometrics, an apartment-market research firm in Dallas, 2010 was one of the best periods for landlords in the past 15 years and may mark a turning point in the short term. (Bing: What's the difference between effective rent and asking rent?)

Rents recently rose again at the Lofts of Greenville, a luxury property in Greenville, S.C. Built in 1900, The chic, renovated textile mill, built in 1900, achieved full occupancy in February. Before that, the landlord, responding to strong demand and low vacancy, made incremental rent increases and eliminated concessions such as one free month. Rates there now start at about $780 for one-bedroom units — 16% more than the average monthly rent in the area — but apartment hunters have not turned away.

"We have more appointments (now) than we have had in the last few months," says property manager Kelly Beasley, who says she expects to maintain full occupancy this year.

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Across the Greenville area, effective rents (which include concessions) increased 11.2% from 2009 to 2010 to $669, the biggest jump nationwide. As Greenville's rental market heated up — vacancies there fell to 7.7% last year, from 9.5% in 2009 — home sales dropped 3.7% year-to-year, according to the Greater Greenville Association of Realtors Multiple Listing System.

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Nationwide, Axiometrics says it expects year-to-year rent increases to hit about 5% this year before cooling to 4.6% in 2012, 4.1% in 2013 and 3.4% in 2014 as new apartments now in the pipeline gradually become available.

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"My advice to renters is to sign as long a lease as you can" to lock in current rates, Axiometrics President Ronald Johnsey says.

Biggest hikes
Axiometrics tracks 88 metro areas nationwide and surveys about 16,131 apartment properties, with more than 4.3 million units. As U.S. rents increased 4.2% in 2010, overall consumer prices increased only 1.6%, according to the Bureau of Labor Statistics. U.S. vacancies fell to 7% from 8.1%, and rent concessions in the fourth quarter dropped to 5% from 7%.; a concession of 8.33% is equivalent to one month of free rent on a 12-month lease.

After Greenville, the metro areas with the highest rent increases were Chattanooga, Tenn., at 10.4% and Savannah, Ga., at 8.4%. On the West Coast, rents in Portland, Ore., and San Jose, Calif., jumped about 8%.

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The New York-Wayne-White Plains area had the 18th-biggest rent hike last year, at 6%, but Axiometrics says it expects the metro will jump to first place this year, with rents expected to increase by 7.8%.

Renter households are unwinding from two- and three-bedroom units into one-bedroom units after many tenants doubled up in 2009 to save money, Johnsey says. Also, more than 1.2 million young adults moved into their parents' home from 2005 to 2010, creating "huge, pent-up demand for rentals," John Burns Real Estate Consulting says.

Rent growth not tied to jobs
Unfortunately for tenants, rents increased as demand for apartments grew — whether the local employment market improved or worsened. Where job creation draws in new employees, many often rent rather than buy in the short term, until they decide in which neighborhood they want to settle. In places with rising unemployment, renting becomes more feasible than buying, especially as it remains difficult to get a mortgage.

"You have less interest in buying homes," Johnsey says. "The turnover rate for apartments has decreased."

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Greenville, an improving job market, is home to employers such as Michelin, General Electric and Fluor. Nonfarm employment grew by 2,300 people, to 294,900, in 2010, according to South Carolina's Employment and Workforce Department. Metro unemployment fell to 9.8% last year, from 10.5% in 2009, based on preliminary BLS estimates. Companies such as electric-bus maker Proterra also announced plans to hire.

As the economy improved, rents at other Greenville properties — such as McBee Station, a high-end, 197-unit apartment community — increased several times in the past year. Occupancy has been near 100% for a year and a half, says Courtney Sauve, assistant manager for the property, and demand isn't coming from local residents. Sauve says most tenants came from out of state or from overseas for job opportunities.

Less fortunate renters in weak economies, such as California's Oxnard-Thousand Oaks-Ventura metro area, also paid more. The average unemployment rate there increased to 10.9% in 2010, from 10% in 2009, according to estimates using preliminary BLS data. The area's 2010 foreclosure rate, 3.81%, exceeded the U.S. average of 2.23%, according to data from research firm RealtyTrac. Area home sales are slow, and as the rental-vacancy rate dropped below 5%, landlords increased rents about 5.8% in 2010.

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Sharlene Oddy, property manager at the 397-unit Creekside Apartments in Simi Valley, Calif., says growing demand for rental housing has helped boost rents in the past year, though a new Archstone property nearby has added some competition.

Housing rebound
More rent increases are expected in the next few years, but levels cannot rise at this pace forever, especially if falling home prices eventually lure people back to buying. Robert Shiller, co-founder of the S&P/Case-Shiller Home Price Indexes, says real, or inflation-adjusted, home prices may drop an additional 15% to 25%.

"If rents go up, people will try to control housing costs and keep them within budget," Johnsey says. "Some renters will say the ultimate way to control costs is to get a house."

New apartments under construction will also loosen supply and put downward pressure on rental costs, although it will be a few years before a significant number of new units enters the market. There were 116,700 multifamily-housing starts last year and 108,900 in 2009, compared with 283,500 in 2008, according to Census Bureau data.

For now, the hot rental market may overshadow weak home sales, but Johnsey says rent increases, job creation and falling home prices are precursors to a stronger sales market.

Click here to see the 25 U.S. cities with the biggest rent hikes on Businessweek.com.

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