Apartment Vacancies and the Fallacy of ‘Recession Proof’: The Boston Edition

By way of Calculated Risk, I came across this Reuters article about apartment vacancies reaching their highest rate in twenty years–and might soon break the record. Currently, the national rate is 7.5%. This matches my impression of the Boston rental market, even in the supposedly ‘recession-proof’ neighborhoods of Back Bay and Beacon Hill. In large apartment buildings (i.e., not smaller houses that have been chopped up into three to eight apartments), the vacancy rate is higher. Using Google cache, rents in the same buildings are down five to fifteen percent in nominal dollars as compared to last year.


As far as I can tell, here’s why this is happening even the recession-proof neighborhoods:

  1. Financial sector layoffs. Some people can’t afford to live in these apartments anymore.
  2. Incomes are dropping. Many people who made a good living do consulting work have had their incomes massively reduced (I know several people in my building to whom this has happened). People will obviously be forced to move to lower rent apartments.
  3. Slowdown of new hires. Apartments always have considerable turnover. If people are leaving apartments, and too few people are replacing them, well, you get vacancies.
  4. Corporate housing vacancies. Corporations have long-term leases for apartments for long-term temporary workers (e.g., a consultant brought in, or somebody from an out-of-town office who is working in town for a couple of months). Until this year, my building, which was about average for the course, had ~15 – 20% of the units on long-term lease to corporate groups. Companies are reducing or eliminating these arrangements.
  5. Physical improvements, at least in the short term, have backfired. While improvements, such as a nicer interior, or various amenities, are thought to enable an increase in rents, anecdotally, I’ve observed that the opposite has happened. First, in the short term, the improvements were disruptive to current tenants who typically use that disruption to negotiate a better rent. Second, in more frugal times, a lot of these amenities, particularly if they’re not used, are seen as unneeded extravagances: people would rather have a lower rent.

While you might be tempted to discount the economic status of a wealthy neighborhood, it matters. Rental prices in wealthy neighborhoods bid up rents elsewhere.
Anyway, from my limited perspective, it really appears to be a renters’ market. Is this what other people are experiencing (in Boston or other areas)?

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9 Responses to Apartment Vacancies and the Fallacy of ‘Recession Proof’: The Boston Edition

  1. Russell says:

    A new generation is learning a lesson the hard way: rent is money down the drain, something that should be minimized, like interest paid.

  2. NJ says:

    rent is money down the drain

    Oversimplification, like saying paying for a haircut is pointless, since the hair is just going to grow back.
    In paying rent, you are paying for a service: A roof over your head. Certainly a valuable service, but that is all you are getting for the money. In contrast, home ownership also gives you a roof, plus a long-term investment, plus a tax break on the interest. But you are taking on all of the maintenance yourself, and you are surrendering some of your mobility. And in some cases, ownership isn’t physically possible.
    As is usually true, there is no one-size-fits-all solution.

  3. bsci says:

    Russell’s comment 1 is just ignorant. Rent vs. buy is heavily affected by the relative prices. One aspect of the housing bubble is that the ratio of home prices to rents for equivalent houses shot up. For example, see: http://krugman.blogs.nytimes.com/2007/12/28/housing-how-far-is-down/
    That means that paying just the interest on a mortgage (i.e. not building equity) was much closer, if not higher than rental costs. Anyone who bought a house after around 2000 has a property that is now worth the same or less than at purchase and has been paying interest, home maintenance, and taxes for years. All that money that was going to paying down a mortgage would have earned more even sitting in a CD. Renting would have unquestionably been a better investment in many cases. (Of course, there are reasons to buy a house besides as an investment)
    Note this does add another reason to Mike’s list. More renters (including me!) are buying houses because the comparative advantage has swung back towards ownership. Fewer people looking to rent means lower rents.
    Another reason is that there probably more rental units. There are probably more people renting out rooms in their houses and people who moved, but couldn’t sell who are renting their homes. More volume and choices also mean lower prices per unit.

  4. Art says:

    #1 – “A new generation is learning a lesson the hard way: rent is money down the drain, something that should be minimized, like interest paid.”
    Ownership is not free. Property tax, costs in money and time associated with travel to a more distant workplace, maintenance, and the legal liability that forces insurance coverage all add up. Renting is only “money down the drain” if the cost of total renting exceeds the total cost, direct and indirect, of owning.
    In some times and places the cost of ownership was so much less than renting for so long that it became a valid rule of thumb that renting was money down the drain. The economic conditions have shifted and become more variegated. The traditional rules of thumb don’t apply in anything but narrow, local, individual cases and situations. It is a more complicated situation.

  5. Chad says:

    So, Russell, so instead of renting I should drop a quarter million on a condo in Chicago because I’m going to school here for the next few years? Fucking brilliant.

  6. Where the fuck are all the people going who used to be renting these apartments? The streets?

  7. Tony P says:

    Here in Providence the situation is VERY bad. Lots of vacant apartments, and more to the point, abandoned houses (Multi family too!)
    Yet rents aren’t moving downward. So now I know where your Boston people are going. It’s here to Providence.
    However, I suspect we’ll see movement soon since the 2nd wave of ARM resets is about to happen in about a year. When that hits the real estate market should be pretty devastated.
    Property values are already starting to slide downward. It’s funny, I remember reading an article years ago saying that once the housing bubble burst we’d see values drop anywhere from 30% to 70%. As an example, one home that has been abandoned in Providence last sold for $350,000 in 2006. It’s now down to $35,000, or a drop of 90%.
    It’s getting to the point where if it continues I’ll be able to buy a block of properties for under $100,000.

  8. ponderingfool says:

    Where the fuck are all the people going who used to be renting these apartments? The streets?
    ****************
    I don’t have the numbers off hand, but I have heard some people are living with other family members. Then there is the fact people are selling or renting their second homes. The former is a pressure to shrink the demand for rental units and the latter is a pressure to expand the supply of rental units. Sadly, yes there may be also more fellow people on the streets as well.

  9. Another Perspective says:

    Many renters are also doubling up and getting roommates for the first time in a long time. one-bedroom renters are often moving up to a two-bedroom and sharing costs. The same goes for corporate housing. Many companies that used to give each consultant their own apartment are now putting two employees in a two bedroom / two bath. Corporate housing demand is down somewhat, moreso in the areas that depend on the financial sector. But is a definite strong alternative to a hotel, becuase of the lower cost and the added convenience / lifestyle – so that sector will always thrive in the long run.

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