Rents rise but apartment units don't

Job and population growth along with high building costs behind price jumps.

By Shonda Novak, Lilly Rockwell
AMERICAN-STATESMAN STAFF

Saturday, June 24, 2006

Apartment-finder Louie D. Divino called to check on the rent for a one-bedroom apartment at a complex Friday morning in South Austin. He was quoted $709 a month.

But when Divino and his customer, Stephen Aarons, arrived at Falcon Ridge Apartments 15 minutes later, the price had jumped to $729.

The increase is indicative of the continued upswing in Austin's apartment market, said Divino, relocation director for First Call Properties, an Austin-based rental consulting firm.

"Across the board, that's what's happening," Divino said. "We've moved into an aggressive market where the landlords have the upper hand."

Apartment rents have been on the rise for more than a year, said Charles Heimsath, president of Capitol Market Research, an Austin-based real estate consulting firm.

Healthy job and population growth, coupled with developers' restraint in starting new apartment projects, are continuing to drive up rents and occupancies.

As of June, the average rent for a two-bedroom apartment rose to $861, up $50 from mid-2005. Occupancy rates are now 95 percent, a four-year high, according to Capitol Market Research, which tracks the apartment market.

"We are entering a prolonged period of rent increases, at least for the next couple of years," Heimsath said.

At one South Austin apartment complex, starting rents for a two-bedroom soared to $960 a month from $720 about three months before, Divino said.

Heimsath said high construction costs are curtailing the supply of new units. With a growing demand, apartment communities can raise rents and still be competitive.

About 1,110 new units have been added in Central Texas through the first six months of this year. In 2005, 1,819 new units were added.

"That is an extremely low number," said Robin Davis, manager of Austin Investor Interests LLC, which compiles statistics on Central Texas apartment rents and occupancy rates. "We have not added many units in the last two or three years."

In 2001, nearly 10,000 new apartment units were added to the market, leading to a dip in rental prices that lasted about three years.

Now, rental rates are climbing toward a high not seen since 2000, when the average rent for a two-bedroom apartment that year was more than $900, Heimsath said.

"Rents are still quite low by historical standards," he added.

Renters took the driver's seat during the tech bust, as tens of thousands of jobs vanished, population growth flattened and the region had a glut of apartments. Occupancy plunged to 88 percent in December 2002; by mid-2004, rents hit bottom, averaging $784 a month.

But as the economy has rebounded, so too has the apartment market.

Two years ago, it was common for apartment communities to offer one or two months free with a lease.

Now, most apartments aren't offering signing deals, except for outlying areas such as Round Rock, Heimsath said.

People are moving to Austin from California, the East Coast and overseas, Divino said. A portion of these transplants rent before buying, adding to the increase in demand for apartments.

"We have not seen this type of migration into Austin since the high peak of 2000," Divino said. "The buzz you heard in the late '90s that Austin's the place to be, that drumbeat is starting to magnify again."

The rental market also is being fueled by rising mortgage rates, which are forcing some existing homeowners — who may not be able to keep with increasing payments under adjustable rate mortgages — to become renters, and pricing some prospective buyers out of the housing market.

"As interest rates have gone up, it's gotten tougher for people to buy," Divino said.

He predicts rents will continue to rise through this year by 3 percent to 5 percent at a minimum.

Renting in Central Texas

Rents are for 2-bedroom, 2-bath apartments. Occupancy rates are for all apartments.

Date Average rent Occupancy rate

June 2000 $913 98%

June 2001 $951 93%

June 2002 $868 90%

June 2003 $812 88%

June 2004 $784 89%

June 2005 $811 93%

June 2006 $861 95%

Source: Capitol Market Research