Oversupply of Coast rentals means more affordability for renters, less profitability
After Hurricane Katrina, some people who lost their homes were commuting from as far as the Florida Panhandle because of the major shortage of housing rentals. If one could find an apartment or house, rates were sky high.
Today, as the fourth anniversary of Katrina approaches, it is a very different world. Some new apartment complexes have large banners outside advertising “$87.90 Move-In Special.” Older apartment complexes are offering deals such as the first two months free and no deposit.
The Coast rental market has really changed. There are actually affordable rentals now. The flip side of that is, especially with high insurance rates, the situation is not profitable for many of the investors.
“The state’s comprehensive housing study estimated that there were more than 1,500 vacant apartment units in June 2009 in the three Coast counties,” said Gerald Blessey, who is Gulf Coast housing director for the Mississippi Development Authority. “As new housing options continue to come on-line, apartment availability has steadily increased. Also, as supply and demand dynamics have become more balanced, apartment rental rates have generally fallen. However, market rental rates still exceed pre-Katrina levels.”
Blessey said more Section 8 vouchers are needed to provide affordable housing for people who live on the Gulf Coast.
Liz Kessey, CCIM, Kessey Realty Network, Gulfport, said apartments on the Coast are overbuilt in her opinion.
“When you see rent concessions like that, you know they are having a problem filling them up,” Kessey said. “A lot of developers jumped and built mega-unit complexes with the Go Zone funds. That is all great. But too much has saturated the market at this point.”
The Go Zone incentives are still good until 2010, and there is a possibility of the Go Zone being continued. But with high vacancy rates, Kessey does not see why private developers would build more apartments or commercial real estate — which is also seeing high vacancy rates.
The positive side of the equation is that housing deals are great for people needing an affordable place to live.
“What was intended was to make sure we had the workforce housing to rebuild the Coast,” Kessey said. “I think it has fulfilled its obligation in that regard because the average person can find an apartment without paying an arm and leg, unlike after the storm when no one could find a decent place to live at a decent price.”
On the western side of the Coast in the Bay St. Louis/Waveland area, a few older apartment units damaged in the storm have been repaired, two new rent-subsidized apartment complexes have been built and a third is currently under construction.
“Rents are actually fairly reasonable now,” said Sharon Matranga, managing broker, Re Max by the Bay, Bay St. Louis. “You couldn’t find anything to rent after the storm. FEMA was subsidizing most of the rent, and when people realized FEMA would pay that much, they upped the rent. After that, the rental market hit a bottom. So owners have had to drop rates to just about what they were before Katrina hit.”
Cynthia Joachim, broker-owner, Century 21 Harry J. Joachim Realtors Inc., Biloxi, and a past president of the Mississippi Association of Realtors, attributes the current oversupply to having so many government programs for assistance. While the Coast was grateful for help from the Go Zone act, small business loans and the Small Rental Assistance program, it now looks like the Coast has “overbuilt like there is no tomorrow.”
“Prior to Katrina, housing was in equilibrium with a fairly consistent pattern of supply and demand,” Joachim said. “There were more renters than properties, but not enough to have a crisis in the market. The rental market was a sustainable business here. Prior to Katrina, it was a great opportunity for investors.”
After Katrina, there was a surge of investors to help rebuild the Coast’s housing stock. But too much of a good thing has made it difficult for investors to turn a profit.
“Certainly for the first two years after Katrina, the market was lopsided with way more demand than supply,” Joachim said. “The Go Zone provided enormous opportunities for small and large investors to get back into the market or try it. There was a lot of construction going on. Four years later, we have a very different turn of events.”
The number one thing that drives real estate growth and appreciation is job growth, and that has been a problem on the Coast with layoffs at the casinos and other employers. Joachim said the combination of lack of job growth and high insurance rates have been a killer.
“Potential buyers are fearful of the cost of insurance,” she said. “People are fearful of storm-prone areas. All contribute to being unable to create a market perception that this is a great place to invest and live. We have had more new apartments built in the past two or three years than in the past 20 years. Now much of that is sitting empty.”
Prices are coming down even on luxurious apartments with swimming pools, walking trails, fitness centers and sometime even tennis courts. That makes it harder for older apartments with fewer amenities to compete.
Adding to the problem is when the home market is unable to relieve itself of too many listings, more people put the homes they were trying to sell into rental units. Slow condo sales have meant some condominiums have been put into the rental market. So today there are far more available home, apartment and condo rentals today than renters.
Joachim said it is sometimes frustrating for Realtors to hear the Coast does not have available affordable housing.
“No one wants to recognize the whole world is driven by supply and demand,” Joachim said. “Insurance went up drastically. Labor and materials went up drastically. With the cost of insurance and taxes in the past two years, we haven’t been able to hold prices down. Sometimes owners couldn’t pay bills. Are they not entitled to any return on their investment? Some haven’t raised rates by $50 a month in years.”
The other thing that has not helped is tight credit.
“Banks simply aren’t loaning,” Joachim said. “All of this has contributed to an oversupply in the rental market on the Gulf Coast. That hasn’t happened in many, many years. It is a strange twist of fate. Without Katrina, we would not have built all of this. We wouldn’t have had the demographics that demanded this type of construction. Every time we have a boom around here, we seem to manage to mess it up. Developers were told we had a housing shortage. Everyone came in to build. We saw so much speculative building. Sorry to say, much of that is sitting now. Many property owners haven’t paid property taxes on time because they can’t.”
The positive side is that there are good deals for people who want to buy in a soft market. Deals are possible that people wouldn’t have dreamed of three years ago.
Joachim has seen many ups and downs in the real estate market in the 32 years she has been a licensed real estate agent. Usually excess stock slowly got absorbed, and the end of the downturn could be predicted.
“One problem with the current economic crisis is we don’t have a playbook for it,” she said. “This is one for the history books. Economists don’t agree. We’re not sure how long it will take to get out of it. Yet we are in far better shape than most of the country. In Jan. 2009, Real Trends reported Mississippi was 48th in foreclosures. For once in our lives, it was good to be 48th in something. Forty-seven other states had higher foreclosures. However, in the past week or two, another tracking company reported that our foreclosures are up significantly.”
But she sees reason for optimism. The $600-million expansion at the Port of Gulfport will create an estimated 6,500 jobs, and those workers will need a place to live. And she said the Mississippi Gulf Coast is in far better shape economically than many parts of the country.
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