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Investing on the correct side of a watershed moment

According to Experian’s Hotwise Report which was quoted in the Sunday May 30th Oregonian, the Internet search clicks for “Apartment for Rent” are up 162% from 2 years ago. Visits to real estate for sale websites are down 22%, and visits to home and apartment rental websites are up 45%. These numbers signal a watershed change in the housing industry as a growing number of individuals rent rather than own.

Historically 30% - 35% of our population rents. That percentage shrank between 2002 and 2006 as the top tier of renters moved into homeownership due to relaxed lending criteria and low interest rates. We are seeing the opposite trend as more and more people choose to rent rather than own. When the housing bubble burst, the demand for rentals shot up and frugality became a hot new value again. Many who could own a home are concerned about job security and want the mobility that renting offers. Others have lost jobs or have seen wages drop and cannot afford homeownership any longer. Lending criteria is tougher now, limiting the number of people that can move from renting to owning. The new reality is fewer homeowners as a percentage of our population which means greater demand for apartments.

Between 2000 and 2006 rents stayed flat and even went down in some areas while the cost to build new properties went up due to increased costs of land, labor, and materials. Because of weakening demand, flat rents, and the increasing costs of construction there has been only a marginal number of new apartments constructed since 2002.

At present, apartment vacancies are moving lower, rent concessions are going down, and rent levels are moving up in some areas and unit types with more to follow.

The demand for apartments is building quickly. A greater percentage of our population is renting and our population is still growing. In the middle of one of the worst recession, city wide the vacancy rate did not climb above 7%. 5% is considered normal. Vacancy rates are now dropping as many of the renters who doubled up or moved home in '08 and '09 are moving back out.

New apartment construction will help bring the growing imbalance between supply and demand back into balance but cannot start until rents climb by as much as 20%. Right now rents do not support the costs of new construction.  When rents finally get high enough to justify new construction, it will take about 18 months for the new construction to come online. When supply finally catches up with demand, rents will stabilize at a new high and then climb with inflation.

Portland’s urban growth boundary increases the cost of local land in the Portland area more than in other markets, thus delaying the start of serious new construction and increasing the amount rents have to climb to justify it.

We have seen this rather dependable pattern between supply and demand with previous downturns but this one is the largest since the early 1980's due to the general downturn in the economy immediately following the bursting of the housing bubble. Coming off the bottom of this turndown is the best time to buy that we have seen since just after the economic downturn following the early 1980’s. We were there and helped many of our clients see make exceptional investments.

There are excellent opportunities to buy local apartments now because most of the traditional buyers are no longer in a position to act. The typical apartment buyer is out of the market because their equity is tied up in property and they would have to sell at the bottom of the market to buy something else. The buyers who are most active today are pulling funds out of the stock market. Much of this is due to concern about the health of the economy in general and the growing desire to invest into something local, insurable and tangible. Apartments meet that criteria and provide for the basic human need of shelter. Affordable housing cannot be outsourced.

The key to capitalizing on this watershed moment is to invest into local Apartments which have strong fundamentals and are large enough to support good professional management. Westland has a successful 37 year history of assisting individuals in the formation of groups to purchase apartments. Many of our clients either lack the funds to buy a large apartment complex or prefer to diversify their portfolio to include several properties.