Apartment Rentals- What Happened?

When the economy took a turn for the worst and foreclosures hit an all time high, many experts expected the demand for apartment rentals to go through the roof. When you looked at what happened in the real estate market, it made sense.
Home foreclosures hit an all time high. The people living in these foreclosed homes need somewhere to live. They can forget about getting approved for another mortgage with a foreclosure on their record.
Unfortunately, if you were banking on being able to capitalize on a flooding of potential tenants to apartment rentals and hoping that this trend would drive up rentals, you probably have realized by now that this has not happened.

What happened?
The challenge with this recession is twofold. First, unemployment is at some of the highest rates it has been for many years. In addition to that underemployment is even higher. Underemployment is when someone is working for a salary lower than what their skill set demands or when someone would prefer to work full time but is forced to work part time because that is the best they can get.
With some experts placing the unemployment and underemployment rate at 20% that means one out of every 5 workers in the United States right now either has no income or has an income that has been significantly reduced.
What this has done is reduced the demand for many items, including apartment houses. Whether you need a place to live or not, the bottom line is if you cannot afford an apartment at a certain rent, you are not going to rent that apartment. Or what happens is you rent the apartment, struggle to make the rent payments and eventually get evicted.
Even though incomes are lower, you would think that the large amounts of people that had homes foreclosed upon still need places to live. Therefore the demand from these new renters should offset any lack of demand from renters with reduced incomes.
This has not happened. There are a number of trends that have contributed to the fact that apartment rental rents in many markets have declined along with the average property values in many markets.
So the question that remains is where are all of these people that have lost their homes? Can we expect an upswing in rental prices at some point in the future?

One trend that is taking place is the downsizing of America. In this case, I am not referring to downsizing in the case of a lost job. I am referring to downsizing where individuals or families are reducing the size and costs of the places that they lived pre-recession in favor of smaller and lower cost properties.
For instance, a family of four consisting of a father, a mother and two children might typically opt for a 3 bedroom apartment or a 3 bedroom house. This way the parents can have a room and each child can have their own room. However, if cutbacks are needed, this family may instead opt to move to a 2 bedroom apartment. The kids will share a bedroom and the family can save several hundred dollars a month in rent and other living expenses.
This type of downsizing reduces the value for larger and higher cost rentals. According to Apartmentratings.com, a website that lists apartments for rent and tracks the prices of apartment rentals in many cities throughout the United States, the average rent for a 3 bedroom apartment listed on its site is $933 a month in 2009. This is an over 9% reduction in rental prices from 2008 and the largest reduction in rental prices since 2001 when they first started tracking this data.
What is interesting to note is that 2 bedroom apartments are only down 4%. 1 bedroom apartments are only down 2%.
What this leads me to believe is that people are downsizing from 3 bedroom apartments to 2 bedroom apartments. People in 2 bedroom apartments are downsizing to 1 bedroom apartments.
What is also interesting about the numbers is that Studios apartment rentals are actually down the highest, down over 12%. This leads to the second trend as to why the prices of rentals are not going up.
The second trend is the doubling up of America. There are a number of workers who either cannot afford to live on their own or are sacrificing living on their own in favor of increasing their savings. Since banks and lending institutions have dramatically reduced the amount of credit that is available in the marketplace, many people have no choice but to start saving.
As a result, many of the individuals and families who were living in homes that were foreclosed upon are moving in with other family members or friends. This type of arrangement reduces the rental expenses of both parties.
Suppose you have two families of 3 people (father, mother and child) that are living in two 2 bedroom apartments. The rent for each apartment is $900 a month. The two families decide to move in together into a 3 bedroom apartment. Each couple takes a bedroom and the two kids share a bedroom. The 3 bedroom apartment is $1000 a month.
Now instead of each family paying $900 a month, they can split rent for $1000 a month. This reduces their rent to $500 a month. If the families split other living expenses, this can result in a significant cost savings for the two families.
Some families are moving in together to save on living expenses. Some individuals are moving in with other individuals to capitalize on these types of savings as well. This is one theory to why I believe that the demand for studio apartments have decreased at such a rapid rate. In addition, some younger individuals and even some families are moving back in with their parents to save on living expenses.
With these two trends in place, I expect apartment rental demands are going to continue to struggle until the economy improves. In a recession people look for ways to cut back and save more and living expenses are some of the highest expenses in the average family?s budget. Therefore it is usually the first area that is targeted for reductions.