The Luck of the Landlords
Supply of Available Rental Homes Is Rising, but So Are the Prices

By Christopher Twarowski
Washington Post Staff Writer
Saturday, August 30, 2008

The slumping housing market hit Teresa Walsh hard.

Seeking a better life for her two daughters, Walsh put her house in Menlo Park, Calif., on the market and moved to Bethesda. She found a five-bedroom, three-bath house on Christy Drive for rent and expected that her home in California would sell.

When it didn't after two months, Walsh was in a tough situation. Due to surgery in June, she was out of work. She was paying the mortgage in California and the rent in Bethesda. To make ends meet, she did what a growing number of people have done the past two years: She became a landlord.

The house in Menlo Park was rented out within 24 hours of posting. So were the spare rooms in Bethesda.

"I can not tell you how many people were calling me about the property. . . . The immediacy of the need is what really impressed me," Walsh said.

Walsh's situation underlines two of the main trends in the local rental market these days: There's an increase in the supply of places for rent, but there's still plenty of demand.

As the credit crisis and rising foreclosure rates continue to batter the housing market, more people who were hoping to sell a home have instead been informally renting or subleasing rooms, houses, townhouses or condominium units -- typically for less than renters would pay at traditional rental complexes. This "shadow market," as it has been called, has moved some renters away from those complexes and toward the accidental landlords such as Walsh. Additionally, around the area, in recent years buildings that were planned as condos have become rentals instead.

Nonetheless, vacancy rates remain relatively low and rents continue to rise.

Nationwide, the number of vacant homes for sale reached a record 2.277 million in the second quarter, according to a report by Richard F. Moody, director of research at Mission Residential, an apartment company with offices in Virginia and Texas. The number of vacant for-rent housing units also hit a record, ballooning to 2.063 million units, as owners who were unable to sell put places up for rent.

"Such shifts from the for-sale to the for-rent segments of the housing market were in full swing, which is likely to continue over the next few quarters," Moody wrote.

This influx of alternative rental units, whether townhouses, single-family houses or high-rise condos, is hard to quantify, although it has had several effects. More rooms to rent means more competition for landlords, more choices for renters.

Vacancy rates for all classes of apartments in the Washington area have increased, to 3.6 percent in the second quarter from 2.9 percent a year earlier, according to a mid-year 2008 report by Delta Associates, a research firm in Alexandria. Even so, the rate remains among the lowest in the country, Delta said.

Remarkably, despite the increase in supply and the increase in vacancy rates, rents in the Washington market have also been increasing. Rents grew by 3.1 percent over the year, according to the study.

Historically, when vacancy rates here hit 2.5 percent or 3 percent, rent hikes vanished, said Grant Montgomery, vice president and market analyst at Delta.

However, he said, there have been more national operators in the area with a different mind-set. That has meant a shift in rent patterns. Where smaller landlords in the past would hold or cut rents to fill vacancies, these companies continue to raise the rent.

"Money can still be had, profits can still be had at a higher vacancy if you're making it up in higher rents," Montgomery said.

This shift represents a "new equilibrium point" in the Washington rental market, he said.

"We're going to see rents continue to escalate over the next few years, even though we're going to see vacancies edge up slightly over the next few years," said Greg Leisch, chief executive of Delta.

Leisch contends that the impact of the shadow market, which had affected the mid-level rental apartment market significantly during 2006 and 2007, has waned.

It hasn't affected business at some of the region's largest landlords, according to executives.

Chris Finlay, managing principal at Mission Residential, describes the Washington region's rental apartment business as reaping the benefits of "ideal conditions." Finlay attributes much of it to the growing demand from the Generation Y population, who are now entering the workforce and looking to rent. He also points to growing numbers of immigrants, who historically have started out in this country as renters.

"We view the fundamentals for the apartment market [as] almost unprecedented," Finlay said. "It's really almost an ideal scenario."

At Kettler, one of the region's largest real estate and property management companies, the occupancy rate is 96 percent, according to Chief Marketing Officer Jamie Gorski.

"So far, we've been able to continue to absorb all those new buildings and even lease against individual units from condo purchasers and still do very well," Gorski said. "So for whatever reason, our market is still a great rental market. It's a great rental market both for owners and both for people who are customers who are renting."

Although the apartment rental market in the Washington region is strong, economists say there is much to watch out for. Mark Obrinsky, chief economist at the National Multi Housing Council, a landlord trade group, said the threat of continued decline in the housing market and a tightening of credit, along with a possible recession, could have a heavy impact.

As for Walsh, the 53-year-old considers her experience this summer as an accidental landlord an accidental blessing. Renting her home in California gave her the opportunity to hold onto it until the market rebounds -- which she feels should happen over the next three years or so.

In addition, opening up her home in Bethesda has given her enough memorable stories to fill a book. (She has been writing them all down.) The revolving cast of characters she sheltered -- a medical student who may one day find the cure to cancer, a doctor from Canada, a high school student and her mother -- brought her and her tenants companionship and support in a time of need. She gives these new friends part of the credit for her speedy recovery from her surgery, as well as for her financial recovery.

"This helped on both levels," she said. "I really feel like it helped me recuperate faster."