FOCUS: REAL ESTATE

As mortgage rates fall, apartment owners lose

Greater Des Moines area renters are fleeing apartments at the fastest pace in at least 12 years, a survey of vacancy rates among Greater Des Moines area apartments showed.

The culprit is mortgage rates, which are currently hovering near lows not seen since John F. Kennedy was president, real estate experts said.

And though interest rates could tick upward in the coming year, apartment owners, many of whom are cutting rental rates or offering other perks to attract as many tenants as possible, are not likely to experience relief any time soon.

That’s because apartment construction stands at near record levels. As new units open up, vacancy rates will continue to climb. In Des Moines’ western suburbs alone, as many as 790 units, or about 8.8 percent of the area’s total number of apartments, are expected to be added this year.

“We’re going to see vacancies go up more yet,” said Clifford McClure, who co-owns Carlson McClure & Associates Inc., a real estate appraiser and consultant that has been tracking Des Moines’ apartment industry since 1970. “It’s a renter’s market right now.”

Earlier this month, Iowa Realty Co., the state’s largest real estate broker, said sales in Greater Des Moines rose 11 percent in 2002 to $2.17 billion. It was the third consecutive year of double-digit gains for the company. Michael Knapp, Iowa Realty’s president and chief executive, attributed the jump to interest rates for home loans, which are at the lowest levels in 40 years.

Iowa’s FirstHome program, which works to provide attractive financing for first-time home buyers in the state, said last week that it was offering a 5.5 percent interest rate.

In the announcement of the rate, which has been lowered four times in the past nine months, Gov. Tom Vilsack targeted apartment complexes directly.

“With this low rate, the monthly mortgage payment for many families would be less than what they pay for rent, which means even more Iowans can become homeowners and benefit from the economic security and stability of home ownership – and our economy benefits from more home ownership,” Vilsack said in a statement.

The average vacancy rate among Des Moines’ 17,353 apartments hit 7.4 percent last year, two percentage points higher than the prior year. The number of empty apartments was the highest on Des Moines’ East Side, where the vacancy rate stood at 11 percent last year, McClure’s survey showed. The lowest rate was on Des Moines’ west side, where the rate was 6.6 percent.

At West Des Moines’ Westwood Apartments, the vacancy rate has jumped to 17 percent, managers said. Renters have left for a variety of reasons, including two who were called to military service. The biggest draw, however, is attractive interest rates for home purchases.

“We have more vacancies now than we’ve had in years,” said Sue Carter, resident manager at the 132-unit complex. “What we’re doing is just hanging on.”

Rental rates for three-bedroom units fell 0.2 percent, the second-straight year of declines, according to the survey. Rents for two-bedroom apartments also fell by the same margin after rising 3.1 percent from 2000 to 2001. Average rents for one-bedroom units rose 1.5 percent and they rose 1.1 percent for efficiency units.

Over the past 10 years, the Des Moines rental market has been able to absorb about 450 new units annually without adding to vacancy rates. That pace has slowed over the past five years. During that time, new units have average fewer than 200 annually. However, there are 1,394 units scheduled to be completed this year.

This kind of rapid growth has happened before. Between 1996 and 1998, there were an average of 800 apartments added annually, McClure has said. During that period, the percentage of empty apartments tripled to 9 percent from 3 percent, the highest in the 32 years that McClure has been conducting the survey.

The 308-unit Turtle Creek is among the biggest single apartment complexes under construction in Central Iowa. So far, there is very little vacancy among the few luxury units that have opened, according to on-site manager Michella Smith.

Part of the reason for the complex’s initial popularity could be the amenities, which include heated garages and stone accents on the brick exterior. The upscale complex looks more like a townhome community than collection of apartments. Rents for two-bedroom units start at $925 per month.

However, the complex’s developers, Omaha-based Richdale Group, are worried that it will be some time before their investment pays for itself.

“When we did our analysis, we did not envision the record amount of new construction and home-buying that has taken place,” said Betty Price, marketing director at the Richdale Group. “This will result in sub-par rent and the consumer (renter) will be the beneficiary.”