As Housing Market Slows,
Rental Market Heats Up

(See Corrections & Amplifications item below.)

Bidding wars, once waged by prospective home buyers in a red-hot housing market, may be moving to a new front: rental apartments.

As rising interest rates and flattening home values have made renting more attractive, renters are beginning to resort to the same one-upmanship tactics to secure a choice apartment.

In Washington, D.C., the owner of the Ellington, a 190-unit rental building on U Street, has a 12-person waiting list, and nearly a half dozen renters are paying rent two to three months before their move-in dates. San Francisco renters are showing up early to open houses and racing to fill out applications before other applicants. In Manhattan, some renters are offering landlords more money than asking rents, while others are paying the equivalent of the entire year's rent upfront in cash.

In August, Adrian and Amanda Liang agreed to pay $5,300 a month for a two-bedroom apartment on Manhattan's Upper West Side -- $100 more than the asking rent and $1,000 more than they intended to spend. "I just wanted to get this done as soon as possible," says 31-year-old Mr. Liang, who moved to New York from San Francisco with his wife after selling his software-services company. "I was sick of looking at places." The couple had spent a month looking at nearly two dozen Manhattan apartments and had lost two apartments to other tenants because when they showed up at open houses, the landlords said they already had plenty of qualified applicants.

Apartment vacancies are just 0.55% in Tribeca, in Manhattan; left: Rob Hielscher and Lisa Lombardi in their San Francisco apartment.

Justin Lindblad, a broker with New York-based Citi Habitats Inc. who represented the Liangs, says another client secured a $2,300-a-month, two-bedroom apartment on the Upper West Side only after offering to pay $13,800 in rent upfront and a $13,800 security deposit. "You're not in a situation anymore when you can wait around a week and think about an apartment," says Mr. Lindblad. "You take it on the spot on that day, or you move on."

Rental landlords, who used to fret as prime would-be tenants jumped into the housing market instead, suddenly are in the driver's seat. Nationally, rent for a 1,000-square-foot apartment has jumped 3.7% to $1,389 a month from $1,339 a year ago, according to data collected by Boston-based research firm Property & Portfolio Research Inc. Rent increases haven't been this high since the fall of 2001, when rents jumped by 4.1%.

A big reason for the rising rents -- and the emerging bidding wars -- is a smaller stock of apartments, caused partly by developers who built condominiums instead or converted existing apartments into condos to take advantage of the once-hot housing market. Rental vacancy rates dropped to 5.3% in the second quarter of 2006 from 6.2% in the second quarter of 2005. The vacancy rate could shrink to 5% by year end, according to Encino, Calif.-based real-estate investment brokerage Marcus & Millichap.

In Manhattan's pricey Tribeca neighborhood, where Citi Habitats says vacancies are a miniscule 0.55%, finding an apartment has been much tougher than Kerry Stichweh anticipated. After looking at 10 different apartments to buy in downtown Manhattan, Ms. Stichweh, a 34-year-old choreographer and interior designer, and her boyfriend, a 50-year-old hedge-fund executive, abandoned their purchasing plans for the more affordable rental market.

But after touring nearly three dozen apartments, they couldn't find anything they liked within their $5,000 monthly rent budget. So next month, they are moving into a fifth-floor, two-bedroom Tribeca apartment that rents for $6,500 a month and initially won't have a working elevator. Still, the couple figures that is a better deal than buying a similar unit -- which would cost more than $1.5 million with monthly payments of about $10,500 including taxes and maintenance fees, according to their broker, Craig Filipacchi of Brown Harris Stevens.

The boom in demand for rental apartments follows several brutal years for landlords. From 2002 to 2005, 438,000 renters from age 20 to 34 nationwide took advantage of low interest rates and became first-time homeowners, says Hessam Nadji, managing director of Marcus & Millichap's research services. Landlords offered free rent for a time and paid brokers to find them tenants.

To be sure, the good times for rental landlords may not last. With the rapidly cooling home-buying market, many condo developers are expected to switch units back to apartments. "The rents aren't going to continue growing like they have," says Manhattan developer Douglas Durst, whose second residential apartment building, which has 600 units, has filled up in the past 18 months. While rents have risen roughly 10% from the year before, he is cautious about developing more rental projects.

But for now, it is a landlord's market. In the second quarter, AvalonBay Communities Inc., of Alexandria, Va., which owns 45,000 apartments nationally and is concentrated in the Northeast, raised its asking rents by 4.7% from the year before and cut concessions by 67% for incentives such as free rent for a month or more and gifts including vacations, microwaves and televisions.

San Francisco renters are increasingly anxious, says Abigail Glynn, a broker with San Francisco-based firm Davis Realty Co. "A lot of them run into the apartment and come running out to hand you the [rental application] papers," she says.

Rob Hielscher, a 31-year-old commercial-real-estate broker, recently moved back to San Francisco from Chicago with his girlfriend, Lisa Lombardi, a 29-year-old occupational therapist. After two trips to the Bay Area and visits to 12 apartments, they moved into a two-bedroom apartment with a private backyard in the Potrero Hill area. To Mr. Hielscher, the $2,300 monthly rent was a better deal than buying a similar unit -- which would cost nearly $900,000, or about $3,800 a month after a mortgage payment, tax savings and homeowners' fees, according to Potrero Hill real-estate broker Greg Angilly.

"I don't plan to be a renter for the rest of my life," Mr. Hielscher says. But "even if the house appreciated, I wouldn't have the money to go to [Lake] Tahoe or take trips because I would be putting all of my money into a mortgage."

Email your comments to rjeditor@dowjones.com.

Corrections & Amplifications:
The photo with this article shows the corner of 14th Street and 9th Avenue, in the vicinity of New York City's Meatpacking district. The caption in this article incorrectly places the location of the photo in Tribeca, a neighborhood farther south.