4 Reasons Why Rental and Occupancy Rates are Down

I just got back from a short trip to California, spending time with my family at Disney Land. My parents told me they are currently looking for investment property in Simi Valley and have put 3 bids on pre-foreclosed and foreclosed homes. Each time, their bid was beaten by multiple bidders.

The good news, savvy real estate investors, bidding blindly, are a true representation of market price equilibrium. The true value of a product or service is what a person is willing to pay for it. This is the same principle behind Google Adwords, the market dictates what the price per click should be.

Could this be the bottom of pricing declines in markets that have seen tremendous depreciation in home values?

With the increase in investors acquiring properties, we are also seeing a decrease in rental and occupancy rates across the nation. Why might this be? In short, supply is greater than demand.

In economics, when supply is greater than demand, prices tend to decrease. In many parts of the country we are seeing a decrease in demand and an increase in supply which is causing rental rates and occupancy rates to fall.

Below are a few reasons why this is happening:

1) Shadow Market 

 - The shadow market is the amount of investor inventory of single family homes, condos, and townhomes that attracts renters away from the multi-family space.

Savvy real estate investors are acquiring properties with 20, 30, 40 percent down allowing them to compete directly with rental prices for apartments. This has put downward pressure on rental prices because apartments are forced to lower the rent in order to keep and attract new tenants. On the flip side, investors are willing to take a monthly loss in the short term until the market rebounds. After the market rebounds, many investors are looking to sell their properties for a healthy profit.

2) Conversions - In the rental market, conversions are properties that were once meant to be sold but are now getting converted to rentals. This is happening quite a bit in pre-construction homes and condos. With conversions, this dramatically increases supply for rentals.

3) Migration - In many parts of the country, people are moving to other states. In fact, according to the census, 32 states saw a decrease in population from 2006 - 2007. The state with the largest percentage of people migrating to other parts of the country was Florida which saw a negative .74 percent change in population from 2006 to 2007. This decrease in population means less people are looking for rentals which means property owners, investors and multi-family property managers must decrease the rental rates in order to attract and keep existing tenants. This is a double whammy for states like Florida where migration and conversions are high.

4) Lower Salaries (Re-Negotiating of Rental Terms) - The national average unemployment rate is now 7.6%. For those fortunate to keep their jobs, they are most likely forced to take a pay cut. With this, many families are renegotiating their current leases for a lower rate. Since supply of rentals is greater than demand for rentals in many parts of the country, landlords are opting to work with the existing tenants and not worry about trying to find another tenant to fill the vacancy.

A recent study from realfacts.com, saw a decline in rents in virtually every major MSA. Average national rental rates for apartments fell from $1,002 in Sept (08) to $993 in Dec (08). The decline in rents also matched a decline in occupancy rates fell to 92.2% in Dec.

For the rest of 2009, we may see a continued decrease in rental and occupancy rates but as demand starts to surpass supply, rental prices will start to gradually go back up.