Image: "Now Leasing" sign
Chris O'meara  /  AP
Areas overbuilt during the housing boom such as Florida, Las Vegas and Southern California may have some of the best deals for renters. This Riverview, Fla., complex tries to entice them in.
updated 6/4/2008 6:33:09 PM ET 2008-06-04T22:33:09

Renters may be the biggest winners in the current housing slump, especially in places like Florida, Las Vegas and Southern California, that have thousands of vacant for-sale and foreclosed homes and condos on the market.

Apartment vacancies are edging up in many areas of the country as frustrated sellers instead try to rent out their homes and condos in once red-hot housing markets. And that is making it harder for landlords to raise rents. In the toughest markets, apartment owners are even offering lease incentives to snag renters.

This "shadow market" of investor-owned homes and condos accounts for almost half of the rental stock, and attracts displaced homeowners more often than your typical apartment renter.

"What's different now is the degree of excess homes and condos being put on the rental market. The sheer volume is creating more competition for traditional rental markets," said Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services, which analyzed the data for The Associated Press.

After staying relatively flat last year, apartment vacancies bumped up in the first quarter from the end of last year, the research showed. The vacancy rate is expected to rise by a half-percent this year to 6.1 percent as the market absorbs about 3.3 million more rental home and condo units.

Nadji also predicts rent growth nationwide will slow to 3.5 percent from 4.6 percent.

The national trend, however, belies what's happening in the country's most beleaguered housing markets. Areas that experienced explosive condo development and conversions of apartments into condos for sale are finding those units unloaded onto the rental market because developers can't sell them.

Sharp increases in vacancy rates plague most Florida markets where condo development was rampant. In Jacksonville, for example, rental vacancies spiked to more than 10 percent in the first quarter, up from 5.8 percent in the prior year. Orlando and Ft. Lauderdale had the next biggest gains in vacancies.

"As the sale activity for condos and single-family homes declined over the last 24 months, investors decided to rent them instead of trying to sell them at reduced prices," said Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors Inc. in Miami.

Since the beginning of the year, the number of rentals on the Miami and Ft. Lauderdale markets combined has risen more than 11 percent to 10,000 from 9,000.

"Our rental activity is about three times what it was three years ago," Shuffield said. "Today, for the first time ever for the firm, we're renting more properties than we're selling."

In San Diego, single-family homes being placed on the rental market are hurting luxury apartment communities, said Rick Snyder, president of the California Apartment Association.

The new supply is preventing some landlords from increasing rents, and other are even being forced to offer freebies like one free month with a one-year lease or upgraded unit fixtures.

"People realize they're getting substantially more value than what they're spending on that rental," said Snyder, who is also president of apartment manager R.A. Snyder Properties Inc.

But there could be some unseen risks behind these bargain shadow rentals. Renters who got homes or condos on the cheap may find a sheriff knocking at the door with an eviction notice if their landlord fails to pay the mortgage.

"Some investors will take any dollar amount to have any cash flow," Nadji said, noting that the rent often only covers a portion of the mortgage payment. "We're seeing a lot of tenants being displaced when landlords get foreclosed upon."

In Southeast Florida, renters have taken notice and have begun to avoid those properties, said Susan Whitney with property management company Riverstone Residential Group in Boca Raton, Fla.

The shadow market battered the rental market in the last two years, Whitney said, as renters opted for investor-owned homes and condos, which helped to drive down rents in the area. But as news spread of tenants getting burned by delinquent landlords, renters returned to the traditional market.

"(They) have become more weary about investor homes and condos, and now concessions in the market have started to decrease," she said.

Meanwhile, renters in some of the costliest cities aren't getting any relief, to their dismay. Rents in pricey San Francisco surged 11.5 percent last year, while New York rents shot up 9 percent and rents in San Jose, Calif., climbed 8.7 percent, Marcus & Millichap said.

Elizabeth Pulido, an administrations manager at a New York hedge fund, recently signed a lease on a 600-square-foot one-bedroom apartment in Manhattan for $2,800 a month. Pulido, who moved from the Bay Area in California earlier this year, originally had hoped to pay only $1,500 per month.

"I quickly found out that you can't get anything decent in Manhattan for that. I think you can get a studio but it's basically a box really," the 31-year-old said. "If I go back to California, I could get double that for the same price and something nicer."

But if job losses continue to mount, rents even in the most robust markets could shrink while vacancies rise, Nadji said.

"Employment has the closest correlation to rental absorption," he said. "Demand for studios and one-bedrooms is weak, while we're starting to see more demand for multi-bedroom, multi-bathroom units because people are doubling or tripling up to save money."

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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