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Apartments: Rents Plunge, REITs Soar

Apartment Building
Apartment Building

A new report from new York-based Reis, Inc., a commercial real estate tracking firm, shows apartment vacancies nationwide rose to 7.8 percent in the third quarter of this year, the highest level since 1986. This as rents plunge accordingly, down 2.7 percent from a year ago. Asking rents, which is what your landlord wants, are down 1.8 percent from last year. Why? Jobs.

"Given the magnitude of the job losses that we are still experiencing in the tumultuous labor markets and some uncertainty as to whether the technical recession is still ongoing or whether it has ended, it doesn't look like a lot of consumers are very confident about going out, or striking out on their own to rent their own place," says Reis' director of research Victor Canalog.

(Video: CNBC's Diana Olick reports on the difficulties faced by the rental sector.)

Household formation in 2008 was half of what it was in 2007 and it's likely worse in 2009. Add to that the fact that home prices have plunged, foreclosed inventory has skyrocketed and the first time home buyer tax credit are all collectively turning would-be renters into borrowers. That fact cannot be understated.

So it begs the question, why are apartment REITs (investment trusts that own and manage apartment buildings) surging?

Names like Avalon Bay and Camden Property Trust are way up over the past three months. The classic divergence between fundamentals and pricing of stocks is coming into play here.

"To the extent that we have been saying bad news will happen to apartment properties for a long time, and we don't expect any recovery through 2010, now may well be, at least for some investors, the time to buy because these REITs are at record low prices," says Canalog. "The question would be has all of this bad news been priced in and I think looking back over the next 6-12 months will determine in hindsight whiter this assessment is correct or not."

Interesting to note though, even during the height of the housing boom, we didn't hit the vacancy rate of 3 percent which we hit in 2000. We only hit about 5.5 percent. Now, with all the government stimulus for housing, and again sky high affordability, apartment vacancies may continue to rise for quite some time, and that means landlords will be forced to lower rents further, which will inevitably cut into REIT revenue.

Questions? Comments? RealtyCheck@cnbc.com