There Must be a Pony, Part 2

It’s a remarkable thing when, twice in one week, I hear news stories about apartment rental rates dropping in Los Angeles. Seriously, what does it take in the cultural context for a piece about falling rents to become a lead story?

There’s no question that rents went up in conjunction with the condo housing bubble, though I’m not really sure what the connection was, exactly. Were there enough people priced out of ownership opportunities who nevertheless could afford luxury-level rents?

In the interest of full disclosure, my livelihood is derived from the design and construction of apartment communities. It is in the interest of my firm, and me personally, that these developments thrive. I remember back in the “salad days” of the condo boom that our Apartment REIT clients watched incredulously, nearly helplessly, as condo developments drove up the price of land available for multi-family communities based on an ever-increasing price per square foot that buyers would pay for digs in the emerging city center, particularly in Los Angeles.

I’ll never forget the day when a 300-unit condominium tower in downtown sold out in one day—leaving the agents to wonder what they’d do on the second day of a weekend sales event.

Then we passed the tipping point, and the REITS, who had been waiting on the sidelines, were able to re-enter the market, taking “broken deals” off the hands of the for-sale developers, who were left standing when the escalation music stopped. Many properties planned as condominiums would be built as apartments after all, which was great news for folks who couldn’t quite step up to home ownership yet, especially at $600 a square foot.

Now, of course, the tables have turned once again with the liquidity crisis. Is anybody building anything, anywhere? Hello? Crickets?

The air has gone out of everything. So what does it mean if rents are falling in a market like Los Angeles? (I wonder if “falling” in this case parallels the government definition of “budget cuts,” which are often simply the lack of an increase over the previous year?) Well, being an optimist, I think along these lines: when things tightened up, some tenants were forced to double up (or more). How much, I wonder, would rates have to “fall” in order for some of those impromptu couplings to reverse themselves? If I were in that situation, what would it take for me to get back into a place of my own, without roommates? $200 a month? More? Less?

More and more rental properties in the design stage are including increasingly diminutive dwellings designed to capture renters first entering the market, with an “organically affordable” price point. Will they enter the market in time to capture some new households from roommates separating due to falling rents enabling them to have a place of their own?

I can only see this as a positive phenomenon in the long run, as more rental households are formed. Sadly, the (hopefully) short-term denouement in rents will yield a sweet harvest of more households, who, when things pick up, will be reluctant to “roommate-up” again, and will contribute to the economics of the next round of rent increases. This will make many of my clients very happy, and I hope to be there with them.

(Daniel Gehman is principal at Thomas Cox Architects)