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The Honolulu Advertiser

Posted on: Friday, June 20, 2003

Apartment demand sinks as home market booms

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By Elizabeth Hayes
Bloomberg News Service

AvalonBay Communities Inc. Chairman Bryce Blair expected renters would stay put during the U.S. recession out of fear they'd lose their jobs, so the developer kept building apartments. Things didn't work out that way.

Mortgage interest rates as low as 5.2 percent induced tenants to become homeowners, leaving developers with too many empty apartments. "The economy eroded more than anyone expected and the recovery continues to be pushed out," Blair said. The Alexandria, Virginia-based developer is starting half as many new apartment buildings this year as last.

The record low rates and a U.S. apartment glut are cutting profits for developers, from the biggest publicly traded apartment owner, Equity Residential, to one of the smallest, Associated Estates Realty Corp. U.S. rental vacancies rose to 6.8 percent in the first quarter, the highest since 1989, and rents were unchanged, researcher Reis Inc. said.

Developers built apartments on the assumption that jobless renters would put off house purchases as they did in the 1990-91 recession. This time, with monthly payments cheaper than some rents, 2002 home sales rose to a record 5.56 million last year.

Apartment developers will complete more than 208,000 units this year in 60 major U.S. markets, 1.4 percent more than the 205,000 built last year, Torto Wheaton Research estimates. Permits fell 3 percent to 327,000 units in May on a three-month trailing average, according to Citigroup's Smith Barney division.

"It's a really, really difficult environment for multifamily housing," said Michael Torres, chief executive officer of Lend Lease Rosen, which manages $1.5 billion, including shares of real estate investment trusts devoted to apartments.

Demand for houses has been one of the few bright spots in the U.S. economy. The lowest interest rates in more than four decades boosted existing home sales 21 percent since 1999 — as consumer sentiment measured by the Conference Board fell 43 percent.

Employment last year fell 0.9 percent and will increase 0.4 percent this year, according to RBC Capital Markets. A slower-growing economy will delay the apartment industry's recovery to the second quarter of next year from the fourth quarter of this year, RBC said.

For the rental market to remain in balance, the economy needs to create five to seven new U.S. jobs for every apartment unit built. Instead, three jobs are being lost for every unit built, said Christopher Hartung, a real estate analyst at WR Hambrecht + Co. U.S. employers have eliminated 289,000 jobs in the past four months and the unemployment rate climbed to 6.1 percent in May, the highest in almost nine years.

"If you look at the multifamily housing supply we're getting now, it's in line with what we got in the late '90s, when we had meaningful job growth," said Andrew Rosivach, an analyst at US Bancorp Piper Jaffray. "We're getting new supply while job growth is lower."