The Petalumahomes.com Realty WebLog

January 17 2008 RENT GROWTH LAGGING BEHIND INFLATION:

Just released government figures put the inflation rate for 2007 at 6.3%. This is bad news for investors in apartments where the annual rate of rent growth is 3.7%. The only Metropolitan Statistical Areas (MSA) that are keeping up with inflation are San Jose (11.2%), Salt Lake City (10.3%), Seattle (9.2 %), San Francisco (9.0%), Tulsa (6.9%) and Portland (6.3%).
A study released by RealFacts shows that occupancy rates are falling and the rate of rent growth is slowing throughout the entire database. Average occupancy fell by 1% between September and December. Only four of the major MSAs in the survey (Portland, San Diego, San Jose and Salt Lake City) had an average occupancy rate over 95%, compared to eleven at third quarter. Now three MSAs, Colorado Springs, Orlando and Phoenix, are experiencing occupancy rates of less than 90%, when none were in that category 3 months ago. It would appear that the much - reported economic slow down is being reflected in these apartment occupancy figures. Changes in occupancy rates are usually seen as a leading indicator in rent movement.
At the moment most MSAs are showing rent growth but the rate of increase has slowed considerably, in most cases, in the last quarter of 2007. However, comparing 4th Quarter to 3rd Quarter, almost the same number of MSA’s achieved a 5% or more annualized increase. Last quarter we found 10 MSAs reached or exceeded that almost magical 5% or more increase, this quarter nine did.
One area that surprised us was the State of Oklahoma. Here the Oklahoma City and Tulsa MSAs posted a somewhat surprising rent growth of 4.5% and 2.5% respectively for the quarter and 5.8% and, as mentioned above, 6.9%, respectively for the year.
In face of these market conditions it isn’t surprising that the number of units added to the rental inventory in the database fell in 2007 compared to other years. Expressed as a Percentage of Existing Inventory we can see how this has changed. 0.84% was added in 2007 compared to 1.0%, 1.13%, 1.5% and 1.98% for the preceding four years. The reduction in the amount of new rental stock coming on-stream may mitigate the risk of over supply in many of the markets. In recent years absorption has not been problematic in most markets and our database as a whole last showed negative absorption in 2002.
It is probably too soon to see from our database what effect the sub-prime fiasco has had on sales of apartment properties. And of course one has difficulty, from a distance, knowing how many proposed sales may have fallen through for lack of available financing. In 2007, we recorded 888 sales, compared to 968 for 2006 and 811 for 2005. The median year built of the properties changed little: 1985 for 2007, and 1986 for the previous two years. Average price per unit was $96,288 in 2007 and $94,629 and $103,411 for the preceding years. The average price per square! foot was $111.03, $107.97 and $117.00 for the same period.

This article was shared with me from Sandylee Sanderson a software developer for Real Estate products. Please visit Sandylee at her website www.wanderingstar.com or email her sandylee@wanderingstar.com

Sandylee Sanderson, CRB, CRS
Star Investment Analyzer, LLC
(800) 667-8924