The Current Challenge For Residential Rentals

By Charlie Basil

The current troubled economic climate has created new problems for landlords. Prior to the downturn, it was widely predicted that a significant recession would be led by the residential real estate industry. Corollary forecasts predicted a boom for multi-family real estate and other leased housing models as a result. In actuality, something much different has happened. Vacancies rates are exploding and rental rates are drastically declining. The reason for this is quite simple. It is a function of supply and demand; and frightened competition.

SUPPLY

Supply of "for rent" housing stock has increased in many primary markets for several reasons. Ranked high among these reasons are the following:

During the last housing boom, many speculative properties were constructed with the growing pool of first-time home buyers in mind. When the "bubble" burst, the developers realigned financial strategies and converted unsold units to "for rent" housing stock.

Many people who own real estate have experienced a change in their financial condition, and can no longer afford their mortgages. Due to the recessed market, they have elected to rent their property instead of selling it.

In higher priced markets, populations are retreating to lower cost options which may include moving outside of the submarket, relocating outside of the metropolitan area or moving within the submarket to a lower cost housing product.

DEMAND

"For rent" housing demand has declined and tenant preferences have shifted. There are several reasons for this shift in demand. Among those reasons are the following:

California is experiencing a net job loss, which reduces the capital available for housing in the marketplace. Additionally, workers and families are moving to lower cost metropolitan markets in search of income and reduced expenses.

Americans have generally become more conservative in spending habits. Thus, tenants have retreated to value-oriented rentals as opposed to higher cost luxury product. In our coastal markets, it had been popular for Landlords to upgrade rental real estate to harness the demand for luxury product and amplify return on investment. Such luxury product is no longer highly desired and therefore, remains vacant or must be reduced in price in order to be competitive with more value-focused rentals. As luxury rents reduce, they create downward pressure on value-oriented rentals as higher quality products enter lower price ranges.

Household consolidation has curbed demand for rentals as Americans have chosen to reduce housing costs by entering into roommate partnerships. For example, two individuals who once lived in separate one-bedroom units have chosen to collectively rent a two-bedroom unit, occupying one unit, but vacating two units.

As supply has expanded and demand has constricted, pricing and terms have moved in favor of the tenant population. Landlords are now experiencing longer vacancy periods and are receiving lower rents. Therefore, landlords are taking drastic measures to compete for the business of a rental pool with seemingly limitless options. Terms like reduced security deposits, no credit check, multiple months of free rent and reduced rental rates are now prevalent in the marketplace. This is referred to as "frightened competition" and has adverse effects on the overall marketplace. It creates a downward spiral as property owners vie to achieve immediate occupancy by offering terms that are increasingly positive for renters and negative for landlords.

Charlie Basil is the Director, Operations and Bliss for the RENT guru, a turnkey residential leasing service that provides landlords with a quick, efficient and cost-effective way to fill vacant properties. The cornerstone of the RENT guru is the signature concierge service which includes:

A determined sales team to manage and execute property tours and open houses during peak traffic hours. -Designer advertisements on craigslist.org, westsiderentals.com and other listing services featuring high quality photos taken by a RENT guru.-Promotional campaigns via email, social media (i.e. Twitter and Facebook) and other information-sharing platforms to quickly spread the word about your property.-SMS (text message) and email information on-site that immediately delivers property details directly to mobile phones.-Comprehensive tenant qualification (credit, income and background checks) and execution of all contracts with delivery of finalized tenant package for your files.-Ongoing customized reports containing market feedback specific to your property

Charlie also is President, The Fresh Basil, Inc. marketing consultancy.
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