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Seattle Sees Biggest Drop in Rental Prices

Rental rates fell across the country in 2009 as people lost jobs and oversupply glutted markets. Seattle's average monthly rent fell 13.8%

When times were good in Seattle and job opportunities and the promise of stock options at booming tech companies such as Microsoft (MSFT), (AMZN) and Real Networks (RNWK) lured new residents, this rainy northwest city became one of the country's most desirable—and expensive—places to live. The high cost of living became difficult last year as thousands in the area were laid off and the jobless rate climbed to 9% in December. To the relief of those leasing apartments, the average monthly rent in the Seattle area dropped 13.8% in 2009, the steepest decline of all U.S. metros, according to new data from AXIOMetrics, an apartment market research firm in Dallas.

"It's a market hit by two things: a high job-loss and unemployment rate and increasing supply," says Ronald G. Johnsey, president of AXIOMetrics. Seattle landlords offered an average 6% concession to attract tenants, bringing the average monthly rent for apartments in Seattle to $1,023.

Similar trends affected housing markets across the country. Reno and Las Vegas in Nevada, Tacoma, Wash., and San Jose, Calif., were among the markets with the greatest percentage drops.

While Johnsey expects New York, San Francisco, San Jose, Dallas-Fort Worth, and Houston will bounce back, he says it will be difficult for most markets to recover to the levels seen two years ago.

Demand slowed as competition grew

For the many residents who spent more than half their income on rent but lost their jobs, new housing arrangements became necessary. Property managers saw people move out of one-bedroom apartments into larger units to share rent with roommates or return home to their families. Others looked at relocating to less expensive neighborhoods if they could not negotiate lower rates with their landlords.

As a result, rent for one-bedroom floor plans across the country saw the greatest decline as more people moved into two- and three-bedroom units, and luxury apartments have slashed rates more than other classes, according to AXIOMetrics.

In other markets, such as the Bay Area, demand dropped as inward migration slowed, according to Lawrence A. Souza, an economist, broker, and investment adviser for the Johnson Souza Group in San Francisco.

At the same time, hundreds, and in some cases thousands, of new units were being added in many rental markets. Apartment owners had to compete with new constructions, condo rentals, and home rentals.

In Seattle, the Rollin Street Flats, an 11-story luxury complex in the South Lake Union section with 208 apartments, started leasing to renters last spring. The property was originally developed as a condominium but, like others in the area, was converted to rental units. It is currently 92% leased.

Signs of an uptick

By the fourth quarter of 2009, the rate of decline slowed in most areas, suggesting that the market is stabilizing. In AXIOMetrics' January survey of 88 markets, 55 had increased rents, the first positive monthly growth since July 2008. This was partly due to landlords scaling back concessions. Occupancy rates were mostly flat. Johnsey says while he is optimistic that rent levels will start to recover this year, this will depend mostly on job creation.

In Seattle, an uptick may be delayed compared with other markets. Dupre + Scott Apartment Advisors, an apartment investment research and consulting firm in Seattle, expects vacancies in the area to climb more as rents fall this year. The firm expects net income after 2011 to grow significantly, as few new units will be added, tightening supply.

Tom Daniels, executive vice-president of Riverstone Residential Group, says rents in Seattle may decline 2% to 5% this year, depending on how much the rate was adjusted in 2009, but the apartment supply is tightening. "We think we've felt the bottom," he says. "Last year we didn't know where the bottom was, but we are more confident today


Rent Price Increase

The city Rent Guidelines Board has overcharged hundreds of thousands of tenants since October of 2008, a Manhattan judge has ruled.

In a decision issued today, Manhattan Supreme Court Justice Emily Jane Goodman found the RGB improperly created a new housing class when it set fixed dollar increases - as opposed to traditional percentage increases - for 300,000 leases where apartments were renting for under $1000 a month.

A "court should not permit a quasi-legislative agency, with a nine member board, appointed by the Mayor of New York, to perform a function originally designated to the [City Council]," which enacted the rent stabilization law, Goodman wrote.

The ruling potentially paves the way for those tenants to seek millions in dollars in refunds. An exact dollar figure was not available, but the RGB predicted it would effect "both tenants and landlords throughout the city," and that untangling the amount of overcharges would create an "administrative burden."

Goodman countered that "any financial burden . . . cannot outweigh a court’s duty to invalidate any act taken in excess of statutory authority," and that the RGB had overstepped its bounds and created an inequitable system.

While the RGB set a maximum increase of 4.5 percent for one year leases and 8.5 percent for two year leases in 2008, it also unveiled a new formula for apartments renting for under $1000 a month to make it more equitable for landlords.

The new formula said landlords could charge whichever rents was higher for those apartments - a 4.5 percent increase or a $45 a month increase for one-year renewals, or an 8.5 percent or $85 a month for two year renewals.

"Hence, petitioner Mercedes Casado, who commenced her tenancy in 1992 and was paying $739.31 a month in rent at the time the petition was filed, is subject to an $85 or an 11.5% rent increase on January 1, 2009. Petitioner Paul Hertgen was paying $685 a month for his Staten Island apartment, and, as of October 1, 2008, his rent will be increased to $770, which is a 12% increase. Thus, the effective percentage increase for long-term tenants is nearly double the increases for short-term tenants," the judge noted.

In effect, she wrote, it "penalizes tenants for failing to move in a city that has virtually no affordable housing."

The city's top lawyer, Corporation Counsel Michael Cardozo, said they would appeal the ruling and ask for a stay until they get to present their case to the higher court.

"We respectfully but strongly disagree with the decision. We are especially disappointed that it has taken the court over a year to issue a ruling relating to 2008 rents that will cause confusion for thousands of rent-regulated tenants and owners throughout the City," Cardozo said.

"We intend to appeal, and will seek to ensure that the ruling does not go into effect until the appeal has been decided."

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