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Why you'll pay more in rent this year

Rents were up last year and they're expected to continue rising. Who or what to blame depends on where you live. The culprits include rising home prices, condominium conversions -- even Hurricane Katrina.

By Melinda Fulmer

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If rent money is harder to come by, blame it on the hottest rental market in five years. The average rent climbed to $940 in the fourth quarter of 2005, according to real estate data firm M/PF YieldStar. And this year, it's going to be even more expensive as rents recover from historically low levels.

"2006 should be the big price correction," for rents, said Greg Willett, vice president of research at Carrolton, Texas-based M/PF. "Everything is really underpriced in many markets around the U.S."

National apartment occupancy rose 1.6% to 95.2% in last year's fourth quarter, the highest point since the fall of 2001. Rising home costs, coupled with an increase in new job creation, is creating a bigger pool of renters, Willett said. But in many areas, the number of apartments is dwindling, as building has failed to keep pace.

"Real estate is out of control here," said Jess Callahan, a 29-year-old Ft. Lauderdale yoga instructor and single mother looking for a two-bedroom rental for $1,000 a month or less. "I've been looking on and off for six months."

The condo-conversion craze
At 99%, Ft. Lauderdale had the highest occupancy rate in the country in 2005's fourth quarter; its average rent climbed 11.6% to $1,104. It joins other cities like Chicago, San Diego, New York, Las Vegas and Miami, where a significant number of apartments are being converted to condominiums.

Last year, condo conversions exceeded apartment construction for the first time in recent history, according to the M/PF report.

Not surprising, five of the nation's tightest apartment markets last year were in Florida, where the condo boom was in full swing. Renters in Ft. Lauderdale say it's virtually impossible to find an apartment in a decent neighborhood unless you're willing to live in converted garage apartment, or pay thousands in rent.

Kim Miller, an interior design assistant who is looking for a one-bedroom in nearby Hollywood. Fla., said, "If you don't have $900 or more a month, it's pointless to even look" in Ft. Lauderdale.

Apartment occupancy in West Palm Beach, Orlando and Miami also came in above 97%, as more apartments were taken off the market in the fourth quarter. With only 400 new units under construction, rents shot up in these areas 12.6%, 7.9% and 6.3% respectively.

Building constraints = pricy rents
The three priciest rental markets were in some of the tightest markets with the biggest hurdles for new construction: New York City, San Francisco and Los Angeles. (To see a list of the 58 most expensive cities for renters, click here.)

Los Angeles was the nation's fifth-tightest rental market with an average occupancy rate of 97.8%, had an average rent of $1,421 in the fourth quarter, according to M/PF, in part because it takes developers as many as eight years to get a project built here.

Rents moved even higher in San Francisco, where 96.4% of the apartments surveyed were occupied at an average rent of $1,573. The highest rents were in New York City, which was 97.1% occupied at the end of last year, with an average rent of $2,400, according to real estate data firm, Reis Client Services. (MPF does not track New York City.)

Other cities where M/PF's Willett expects to see big jumps in occupancy and rent this year include Austin, Texas; Las Vegas, Nev.; and Phoenix, Ariz, where apartment construction was lapped by demand. Jobs in these cities are growing at a fast pace and home prices are rising quickly, making the limited stock of apartments more appealing.

"The fact that home prices have climbed so much has widened that gap (between renting and owning) again," Willett said. "This is the most optimistic I've seen (landlords) in a long time."

The Katrina effect
Renters in Houston can thank Hurricane Katrina for boosting their rents. Due in part to the influx of evacuees last fall, Houston's apartment occupancy rate jumped almost 5% to 94%, and rents climbed 3% to an average of $692. Atlanta, Dallas, Birmingham Ala., and Nashville, Tenn. also reported gains as relocations from Katrina began setting down roots.

A recent survey by the National Multi-Housing Council of large apartment owners showed that 42% had seen "modest" improvement in leasing as these new residents moved from hotels to apartments. While some of these new apartment residents could return home in the next year, analysts believe many will remain in their new homes.

"Probably somewhere around half of the people who spread out to new locations will end up staying in those locations," Willett said.

Want lower rent? Move to Cincinnati
Rents aren't rising everywhere. Apartment landlords in Cincinnati, Ohio; Raleigh and Greensboro, N.C.; have been forced to lower rents as the job picture remains stagnant. And analysts are expecting further job cuts in Detroit, Pittsburgh and Atlanta, which may allow renters to call their own shots.

Still, economists say, the recovery in most of the nation's rental market has been fairly quick, and should last for the next couple of years.

"Three years ago, rents were going down," all over, said Mark Obrinsky, chief economist with the National Multi-Housing Council in Washington D.C. "Now rents are going up higher than the rate of inflation." And that, Obrinsky said, should spur some developers to begin building again.

In the meantime, however, property managers such as Dan Murphy of San Diego's 1,410-unit La Mirage apartment complex, know that they have the upper hand in negotiations and plan to hike prices.

"It's been very busy for us," Murphy said. "I'll probably up the rents a little bit each month.

Faced with such rising rents, Ft. Lauderdale renter Callahan said she'll just have to make do, either taking on a roommate, or getting a smaller place.

"I have three weeks to come up with something," she said. "I'll just have to settle for something I might not want, until I can find something I do want," she said.