Edwin J. Shanahan – ‘Mixed message’

About a year ago, tenants in one Cambridge apartment building saw their rents increase as much as $250 a month.

Some tenants, unable to afford the rent hike, decided to move out and the landlord was left with several vacant units that he struggled to fill. Today, rents in that building – and in apartments across the Bay State – are starting to come down as vacancies rise.

Landlords in some communities, recognizing the tight financial situation that many tenants find themselves in, are not demanding rents as high as they once did and are offering to split or pay the entire broker’s fee to fill empty apartments.

The economic downturn – job layoffs and overall uncertainty about the future – is behind some of these rent freezes and other incentives offered by property owners. Just how long that will last, however, is hard to predict, according to local real estate professionals.

It’s a situation in transition, said Patricia Mazza, a broker who handles rentals in Cambridge, Somerville and Arlington.

Some of these landlords were really pushing [up] the rent when the market was strong, said Mazza, owner of Patricia Mazza Real Estate in Cambridge. I think, in general, it’s a hard time to really push to get the highest rent in the marketplace. I think this is the time when everyone is being more thoughtful about what is the right rent.

Cambridge and Boston property owners aren’t the only ones feeling the pinch. Property owners all over the state are being affected by the softening market, according to John Luchini, president of the Massachusetts Rental Housing Association, a grassroots organization that represents about 20 local property owner groups throughout the state.

No matter where our members are located, they are seeing a general softening of the market, said Luchini. The Greater metropolitan areas – Boston and Worcester – will have to adjust more. But even the New Bedfords, Lowells, and Tauntons are making adjustments, although they may not be as radical.

Property owners are very sensitive to market changes, said Luchini, and are making efforts to keep vacancies low.

The vacancy rate in Greater Boston has risen to about 5 percent, according to Edwin J. Shanahan, chief executive officer of the Greater Boston Real Estate Board. That is still low compared to the 9.7 vacancy rate of the early 1990s, when people were choosing to live with two or three roommates or their parents.

Back then, we were in the depths of recession. Without question, people were not moving, said Shanahan. As a result, our vacancy rate kept creeping up.

While the current vacancy rate is higher than the 1 to 2 percent vacancy rate of the last few years, Shanahan said it reflects the normal flow of people moving and is lower than other parts of the county.

Nobody’s terribly concerned about the [rental] market right now, said Shanahan.

In fact, some of the higher-end properties in Boston’s tony neighborhoods are still nearly or completely full.

Out of the four apartment buildings on Commonwealth Avenue, Beacon Street and Charles Street developed by the Raymond Property Co. in Boston, only one unit is empty, according to James English, the company’s senior vice president.

The high-end apartments, which range in price from $1,700 to $1,800 a month for a one-bedroom to up to $2,400 a month for a two-bedroom, typically draw longer-term tenants. The company, which developed the luxury condominium project in Back Bay called Trinity Place, doesn’t have to deal with a lot of vacancies every fall like some of the other property owners who rent to students.

According to English, the downtown Boston market has not been affected as much as the suburban rental market because more apartments have been built in suburban communities.

In Boston, the supply is static, he said.

As far as what type of apartment owners will be affected more during these times, local real estate experts offer mixed opinions.

Shanahan said owners of luxury apartment buildings and bigger properties tend to command higher rents, but they’re also the ones that start feeling the resistance to rents first.

In contrast, owners of smaller properties focus more on getting longer-term tenants than on charging the highest rents that the market will bear. They are also more susceptible to market fluctuations, and are less likely push the envelope when it comes to rent hikes, he said.

A vacancy for a smaller property owner may be more critical than an empty apartment in a building with hundreds of units.

On the other hand, larger complexes tend to be a bit more impersonal and experience more turnover, English said.

Brokers like Mazza are noticing more vacancies than is typically normal during this time of year because people aren’t moving.

In times of uncertainty, people really don’t want to move, she said. To fill apartments, some landlords are starting to pay the entire broker’s fee, splitting it, or are providing breaks on rent – like a half-month’s rent for free, said Mazza.

That’s a big contrast to recent years when, as inventory shrank, landlords were making tenants pay the entire fee.

Wage/Rent Disparity
However, the incentives that some property owners are resorting to aren’t likely to help low-wage working Americans who can’t afford rents in many metropolitan areas, including Boston, according to housing advocates.

A recent national report illustrates the growing gap between rental housing costs and the minimum wage, particularly in Massachusetts. According to the report, minimum-wage workers in the Bay State must work 105 hours per week or earn $17.56 per hour – more than 2.5 times the $6.75 per hour minimum wage – to afford a two-bedroom apartment. That places the fourth on the report’s list of the nation’s least affordable states and districts, trailing only California, New Jersey and Washington, D.C.

In Boston, minimum-wage workers face an even steeper uphill battle. They would have to work 157 hours a week and earn $20.21 an hour to afford a two-bedroom apartment.

The new study, Out of Reach 2001: America’s Growing Wage-Rent Disparity, released by the National Low Income Housing Coalition, shows that than 40 percent of renters in Massachusetts are using more than 30 percent of their incomes to pay rent.

Despite the slowing economy, there’s still a housing squeeze on low- and middle-income families, said Aaron Gornstein, executive director of Citizens’ Housing and Planning Association. Rents are continuing to rise. There is some softness in the higher-end market, but that hasn’t translated into landlords reducing rents.

The NLIHC study actually understates the problem because it is based on fair market rents set by the U.S. Department of Housing and Urban Development, which are typically much lower than actual rents, Gornstein said.

According to the study, a family would have to earn at least $42,000 to be able to afford a two-bedroom apartment. Gornstein said many service workers earning $20,000 or less, including janitors and restaurant workers, are priced out of the market.

If you’re making $20,000 a year in Massachusetts, I haven’t heard of any stories of those workers getting breaks on rents, he said.

Shanahan said he had not seen the NLIHC study and could not comment on the findings. However, Shanahan said part of the problem could be solved if more housing were built in the state to better satisfy the demand and ease prices.

There have been many other housing studies that highlight the problem and call for the construction of more homes, said Shanahan, but despite the studies there are still communities that want to block development projects – particularly apartments.

We’re sending a convoluted, mixed message to the development community, he said. We need to stop speaking out of both sides of our mouths.