September 1, 2011Kyle KazanComments 0
For apartment owners in many markets in California, I have some very good news to report! But as I like to receive information in a “worst first” approach, I too will share it in this manner.
As you know I have been closely following and writing about the debt crisis’s that have been popping up over the last few years in Europe. The so called PIIGS (Portugal, Ireland, Italy, Greece, and Spain) are having the biggest problems with volatility in their bond yields. Last summer I took my wife and son on a trip to Italy, France, and England and spoke to many people along the socioeconomic spectrum to receive unfiltered information from the ground. Italy was most interesting in its dysfunctional way while France had wonderful wine and many fine Brits shared their huge concern about the austerity measures being put in place. The visit offered excellent perspective of problems in the old world.
This summer we traveled to Portugal and Spain. While we were overseas there were much publicized riots in Greece and at the same time, there were protests and clashes with police in Barcelona and Madrid which received very little fanfare in comparison. Unlike last year, the protesters were easy to find as they were marching up main thoroughfares or were camped in main city squares.
To be clear, I understand that each country has different entitlement programs and tax structures but like the United States, expenditures significantly outpace tax collections. The majority of the protesters in Spain are under 30 years of age which isn’t a surprise given that unemployment is over 40% for that age demographic. The protesters disputed that number as far too low and said it is actually between 50% – 60%. In any case, there is palpable anger at the government as they realize that increased borrowing to solve a debt problem is simply a bailout for the banks. All the while social programs are being cut and debt holders are currently being made whole from new bond issuances. I’m not making policy arguments, just observations from the grass roots level.
The author in front of a mural that mocks bankers in Barcelona.
A large protest in the Plaza Mayor in Madrid.
While each country will eventually be forced to find a way to live within its means, the path will be extremely difficult and that seemingly quarterly bond/debt crisis will get worse and worse. It reminds me of a Eurozone whack-a-mole only each time the mole gets a little bigger and the club gets a bit smaller. As said before, adding debt to a debt problem is simply delaying the inevitable and growing the problem.
Now for the good news. I recently wrote that concessions were burning off in many submarkets around California and now I can report that rents are rising. While this is not true for every submarket (in other words, conduct a rent survey of your respective area for accuracy), we are seeing a tightening.
My advice is to move cautiously since unemployment is still hovering around 12% in California. Being nimble and lowering rents in hard times to keep units occupied is necessary–albeit painful–but when the slack tightens, take advantage of it. I’ve started by raising the asking rents on vacant units before pushing revenue on existing residents. As always, this is the alpha garnered from good property management so be diligent or hire someone who is.
Source: California EDD
When asked how the rental market has begun gaining traction in the face of such high unemployment numbers, my theory is that it is a combination of foreclosed homes being taken off-line and much stricter guidelines for potential buyers. This has forced more people into becoming renters. In any case, after several difficult years, I’m enjoying the better climate for however long it lasts.