Rental market in a vicious cycle

When the "foreclosure crisis" is mentioned, thoughts immediately turn to single-family homeowners, perhaps those who took out exotic adjustable-rate mortgages or bought too much house for their means and now find themselves in danger of losing their dwellings to their lenders.

But it isn't only single-family homes that have been affected by foreclosures -- so have multifamily apartment buildings and rental homes. Happening mostly under the radar, some overextended Twin Cities landlords have been defaulting on their mortgages, resulting in blameless tenants being made homeless and forcing them to "double up" with friends or relatives in other rental units.

Meanwhile, a new study indicates that the "doubling up" phenomenon is, in turn, contributing to a surge in rental unit overcrowding and is helping to depress rents for struggling apartment owners -- thus keeping the multifamily market firmly entrenched in the doldrums.

Conventional commercial real estate wisdom has long held that what's bad for single family home sales is good for the multifamily rental market. In past years that has largely been true, but the financial meltdown that brought on the current recession and its massive job losses has changed those rules.

The foreclosure crisis in renter-occupied buildings has been pronounced in the Twin Cities. In a market dominated by small, local owners, apartment buildings and rental homes have been a higher-than-average percentage of total foreclosures.

Research by the University of Minnesota's Humphrey Institute indicated that as much as 60 percent of buildings foreclosed on in Minneapolis-St. Paul in 2006 and 2007 were renter-occupied. Part of the reason is that unlike many other cities, a substantial portion of the metro area's rental stock is composed of single-family homes owned by small landlords rather than by companies. The U.S. Department of Housing and Urban Development estimates the figure to be 20 percent.

Cathy ten Broeke, the Minneapolis/Hennepin County coordinator to end homelessness, said that foreclosures on both rental and single-family homes have led to overcrowding and doubling-up among tenants who still have homes.

"We estimate that about 10 percent of families in homeless shelters have come from foreclosed properties. Providers like St. Stephen's Human Services and Catholic Charities are working to help support both distressed landlords and their tenants."

Vacancy rates for rental units are on the rise despite the unaffordability of homes. HUD Deputy Assistant Secretary Erika Poethig, testifying in January at a Minneapolis hearing of the U.S. House Subcommittee on Housing and Community, said demand has dampened for most rental classes due to rising unemployment. Meanwhile supply has increased because of the "shadow market" of condo-to-apartment conversions.

"Spreads between asking rents and effective rents are widening," Poethig said. "Asking rents are now $65 higher than effective rents."

That gap -- 6.6 percent of the effective rent -- is the largest over the past four years, she noted.

Meanwhile, a study published this month by University of Southern California researcher Gary Painter interpreted data from the U.S. Census Bureau's American Community Survey as indicating a dramatic almost-fivefold increase in overcrowding in U.S. apartments, defined as having more than one person per room in the household.

"People still think there's this inverse relationship between the homeowner and rental markets, that apartments must be doing well. But that correlation is not as easily applied now," he said. "With doubling up, parents willing to let kids stay at home longer and government policies like the first-time homebuyer tax credit that encourage homeownership, it's all negatively affecting vacancy rates."

Appert said that when single-family homeowners lose their houses to foreclosure, they rarely move into traditional apartment complexes. Rather, they opt for the shadow market of nontraditional rentals, such as other foreclosed single-family homes or condominiums.

"These shadow rentals have been a real problem for the apartment industry," he said. "There are many massive single-family developments and condominium complexes that are dotted with rentals. Along with the job losses, it has not helped the vacancy situation."