Slower real estate market spurs growth in rentals
Bellingham is a great place to live. The problem is finding a great place to live in Bellingham.
As the real estate market recovers from a summer of woes — mainly the extinction of the subprime loan and the fallout it created — a new trend is emerging. Buyers are turning into renters.
In a town where roughly half of the residents are already renters, according to 2000 census data and current market statistics, these new market pressures are creating some awkward growing pains.
“What’s happening in a number of cities, including Bellingham, is that the housing market is slowing and the rental market is heating up,” said Julie Hansen, a professor of economics at Western Washington University and the editor of the annual Whatcom County Real Estate Research Report.
As renting becomes more competitive, rates continue to rise. The Whatcom County Real Estate Research Report shows that in March 2007, the average rent for apartments of all sizes grew to $709 per month, up from $679 in March 2006. That’s an increase of 4.4 percent in one year.
Sandi Jones, a broker for Windermere Management by Ebright Wight, said that she saw rates increase as much as $100 for single-family units in the last year.
“We’ve been pretty static for quite awhile,” Jones said of the rental market. “But this year we saw a considerably larger increase [in rates].”
Windermere Management by Ebright Wight manages 1200 units in and around Bellingham and has tenants for almost all of them. Their vacancy rate recently dropped to 1.2 percent — their lowest in over a year and well below the current industry average — after having a hot market this summer, Jones said.
Troy Muljat of The Muljat Group said he expects that trend to continue, at least for the short term.
“It’s supply and demand basically,” Muljat said. “Demand continues to increase and supply diminishes.”
Increasing home prices, combined with the current credit crunch, is playing a major role in turning buyers into renters.
Last year, the average house in Whatcom County sold for $324,852, a jump of 12.7 percent. The median home price was $283,000, an increase of 8.9 percent. This is leaving many prospective buyers priced out of the market and pushed into renting, Hansen said.
And Bellingham is growing; the population grew by 9.4 percent last year.
“Anytime you have a growing population, you have more demand for apartments,” Hansen said.
Even before the housing market started to fade, the Whatcom County Real Estate Research Report showed that the demand for rentals was increasing early this year. In March 2007, the average vacancy rate for apartment buildings with 20 units or more fell to 2.3 percent, its lowest point in almost a decade.
Translation: it’s a good time to be in property management. Units are full and rents are going up.
Condos a safer bet for developers
The supply of rental units is something that has remained fairly steady in the past, thanks to a consistent number of college renters who return year after year and a steadily growing population. The problem is that now the demand has increased faster than the supply can keep up.
“What you have seen in the development market over the past three years is really a lack of construction in multi-family residential rental properties,” Muljat said. “Right now it is not feasible for developers to build residential rental properties because the potential income does not justify the cost.”
The return on investing in a rental complex is just not enough to entice developers. Most developers prefer a safer investment with a higher return: condominiums.
“With the emergence of the condominium market — and to a certain extent the increase of the condominium market — that has increased land values,” Muljat said. “Therefore, developers are not able to pay condominium land prices and build out residential rental properties. So either land prices have to come down or residential rates have to move high enough for developers to want to build [rentals].”
The housing market and the rental market tend to ebb and flow in relation to each other; as one expands, the other shrinks. Now that the rental market is gaining strength, Jones said she has seen an influx of single-family homes.
“There’s an awful lot of people who haven’t been able to sell their house and are now putting it on the rental market,” Jones said. “Typically we don’t have a lot of single-family homes on the market.”
Unfortunately, the best time to rent out a two- to three-bedroom single-family unit is during the summer — before school starts — so those just now entering the rental market may have a difficult time finding tenants, Jones said.
“There are not very many people looking to rent this time of year,” Jones said. “So do whatever it takes to make your house stand out above the rest.”
Until the supply of rentals catches up with the increasing demand, renters can expect rates to continue to rise, Jones said.
Thankfully, that trend won’t continue that way forever. Rental rates can only go so high and eventually the pendulum will swing back toward a seller’s market, Muljat said.
“We’re just in a cycle and we’re going to have to wait for it to work its way out,” Muljat said. “Eventually we’ll come back in balance — and then we’ll go out of whack the other way.”