Density Destruction and the Economy of Rents

Unless you have lived on a different planet for the last three years, it is very apparent that we are in a period of economic contraction/stagnation/malaise.  This has created uncertainty about the future in the minds of many people and this attitude change has had a direct impact on the rental market.  However, the results of this change may surprise you.

Before I get started, lets queue today's visual of a plat map of my street (click to enlarge):

When people think of hard economic times they think of things going down: Property values go down, incomes go down, vacation time and spare time go down.  At least that is the general mind set.

With that expectation many people expect rents and occupancy rates to go down as well.  However, a survey of the market reveals that this is not happening.  In fact, in some cases, rents are going up!  What is going on here? 

To help us understand what is happening we need to look at rentals with an eye toward supply and demand.  Lets review the basics of demand for housing in general:

1.  Everyone needs a place to live
2.  People typically pay 30%-40% of their income to pay for shelter
3.  An increase in jobs increases demand for all housing and vice versa
4.  Population growth increases demand for housing.
5.  Obsolescence decreases demand for housing.

What we are seeing in the market is a very interesting increase in demand for most rentals.  The extra demand is coming from individuals who are losing their homes to foreclosure or otherwise needing to consolidate their housing expenses. Also, many qualified people do not want to buy a home due to the uncertainty of their future employment.  However, they are willing and able to rent and do so.  Our state population continues to grow which pushes demand upwards.

Also, at the same time, the supply of available rental housing is being constricted.  Many rentals, shaded red in the graphic above, are vacant due to poor condition or obsolescence.  Many of these buildings have foreclosed. Once the bank owns them, they are taken out of the supply pool until a landlord can buy them and restore them to tenable condition.  The financial barriers to purchasing these kinds of rental units are many and therefore most of these units are sitting vacant while the banks wait for market conditions to improve.

Another factor affecting the Ogden rental market in particular is the drive to consolidate sub-divided houses and demolish unsavory property.  In the last several months, I have watched 12 rental units in my area be eliminated through demolition.  Last year, the condo complex at 23rd and Quincy burned and that removed 30 units from the market.  Also, last summer, 5 units burned behind my home and eliminated those from the marketplace.  I am aware of two separate fourplexes in my neighborhood that lost their non-conforming use certificates and now must be restored to single family homes.  That is eight units turned into two.
 
Lets look at the figures for my neighborhood.  Under ideal circumstances, 84 of the 89 available units on my street would be rented.  The ambient vacancy rate even during good times is around 5%.  However, today 14 of the units are bank owned and unavailable to rent.  The supply pool is reduced 15% to just 75 units because of market distress.  With potential demolitions looming over the horizon for some of these homes, that rental pool will be reduced much more.   
   
The bottom line is that rents are maintaining their pre-recession levels in the Ogden market.  I have raised my rents quite a bit over the last year.  So, if you are nervous about rents, don't be.  The dynamics that are in place will be here for quite some time.  When the economy improves, rents will increase again as wages increase.  But, it's better to own your rentals before that happens because prices tend to go up then too.