Demand for apartments will remain strong as tighter lending standards shut the door on homeownership for renters, according to a national survey.
The 2007 Quarterly Survey of Apartment Market Conditions found that respondents reported few changes in the strong apartment market conditions recorded three months ago. When asked about how the subprime mortgage meltdown was affecting the flow of renters leaving to become homeowners, 37 percent noted a small decrease while 18 percent said there has been a big decrease.
But the outlook on apartment demand in the Boston area isn’t as bright. Demand for apartments will dip and won’t begin to climb until 2009 when job growth picks up, according to a local real estate research firm.
Apartment vacancies will remain flat in the Boston metropolitan area over the next five years, hovering just above 5 percent, Property & Portfolio Research reports. The Boston-based research firm analyzes 54 major metro areas nationwide, including the Boston area.
The Boston metro area includes the city and surrounding suburbs and stretches from southern New Hampshire to Rhode Island and west of Worcester.
Mark Hickey, a real estate economist with Property & Portfolio Research, said the subprime mortgage market hasn’t had as much of an effect on apartment demand in Greater Boston because the area doesn’t have as high a percentage of subprime loans as other parts of the nation.
“You also don’t have the amount of employers that are tied to the subprime loan industry, so you’re not getting that additional ripple effect,” said Hickey.
Instead, the housing market is affecting renters who are sitting on the sidelines waiting to see whether prices will continue to decline, he noted.
‘Restricted’ Supply
The good news for landlords is that rents are expected to climb both in Boston and the greater metropolitan area. Property & Portfolio Research projects that average rents in Greater Boston will increase 3.5 percent this year from a year earlier and climb 3.4 percent in 2008. The average rent on a two-bedroom apartment in the Boston metro area was about $1,500 in the second quarter.
In Suffolk County, rents are anticipated to grow 3.9 percent this year and 3.3 percent next year. The average rent for a two-bedroom unit in Suffolk County was $1,620 in the second quarter, according to Property & Portfolio Research. The rent growth comes after rents stagnated and declined from 2002 through 2005.
Meanwhile, vacancies are expected to be about 5.2 percent in Boston and the surrounding area over the next five years. The vacancy rate in the second quarter was slightly over 5 percent.
“Supply in Boston is restricted, which keeps the vacancy rate low,” said Hickey, noting that it can take larger apartment projects 10 to 15 years to get fully permitted.
That’s in contrast other parts of the country, such as Austin, Texas, that see an explosion of residential construction when demand surges.
In the National Multi Housing Council latest survey of market conditions, 59 percent of respondents reported no change in occupancy rates and/or rents during the first quarter. A quarter of respondents said that occupancy and rents rose during the first quarter.
The survey’s Market Tightness Index stood at 55. The index was 56 in April and 54 in January. A reading above 50 indicates that conditions are improving, while a reading below 50 indicates that conditions are weakening.
This was the 16th consecutive quarter in which the index was above 50, according to the NMHC.
However, the survey showed that there was a significant deterioration in debt market conditions. The Debt Financing Index dropped to 26 from 54 in the last survey. NMHC attributed the decline to higher interest rates and tighter underwriting by l enders.
“Conditions remain generally favorable in the apartment markets, with demand for apartment residences continuing its gradual but sustained rise,” NMHC Chief Economist Mark Obrinsky said in a prepared statement. “While debt financing conditions took a turn for the worse, equity capital remains abundant. This could lead to a shift in the composition of the investment market, however. If current conditions remain in place, highly leveraged private buyers may lose their place to REITs and institutional investors who rely more heavily on equity financing.”
The Sales Volume Index was 39, which is virtually unchanged from the last index reading. This was the seventh straight reading below 50, indicating that there are more markets with lower sales of apartment properties than there are markets with higher sales volume, according to NMHC.
