Market looks good for landlords

By Matt Woolsey, Forbes.com

Whether they're waiting out the housing storm, or smack in the middle of it, an increasing number of Americans are choosing to rent, not own. And that's good news for landlords and investors.

Foreclosures and risky lending have dogged the housing market. As lenders have tightened their standards, attractive mortgages have grown harder to come by. Yet rental fundamentals have remained strong, especially in the 10 areas that made our list of Best Markets for Landlords.

Tops on our list: New York City, where in the past 12 months rents have jumped between 7.4% and 7.9% across the Class A, B and C apartment classifications ("A" being the most luxurious, "C" being the least). In the Big Apple, 80% of the population rents, and the city's unaffordable housing entices few to make the leap to homeownership.

Rounding out the top five are Seattle (where rental-property construction has been low since 2003); San Francisco; and Oakland and Orange County, Calif. Credit the giddiness of West Coast landlords to the general lack of affordable housing in those markets.

Methodology
With the help of Marcus & Millichap, a real-estate investment firm, we took into account dynamics that affect the supply and demand for real estate. Present vacancy rates and planned new construction of apartments and condos affect supply, while job growth (which encourages people to move to a city) and affordability (which tilts the rent-vs.-buy dynamic) play with demand.

One curious finding: The best locales for landlords and investors aren't necessarily the worst for renters. Take Las Vegas. While vacancies there have jumped over the past year and rental rates have remained low, the city ranked seventh on our list due to its job growth: 4% year-over-year. Sin City is the second-best city in America for job growth, at nearly three times the national average, according to Mercer Human Resource Consulting, which recently simplified its name to Mercer.

The also-rans

Foreclosures have a direct effect on the rental market, and the subprime debacle has certainly contributed its fair share. According to RealtyTrac, in the first six months of 2007, the number of home foreclosures was up 58% versus the same time period last year.

The homeless are flocking to landlords' arms. In Detroit and Cleveland (not on our list), where foreclosures have surged, rental markets are tightening at some of the nation's fastest rates.

Typically, rental markets tighten when the population and number of jobs increase -- the opposite of what's happening in both cities. In the past year, Detroit's rental vacancy rate has dropped to 5.4% from 6.9%, and Cleveland's fell to 5.7% from 7.3%, according to the National Association of Realtors.

Landlords in Salt Lake City are grinning, too. Though it barely missed our top 10, Salt Lake has asserted itself as the small-market-that-could. In the past year, rents jumped between 6.8% and 6.1% across the three rental classes, and vacancy rates fell to 2.6% from 4.3%. Small-fry Portland, Ore., gave it a good run, too: Rents there increased between 5.9% and 6.6% across the classes, and the vacancy rate dropped to 3.2% from 4.1%.

Best real-estate markets for landlords

Rank
Market
Annual increase in average rent
Average monthly rent in luxury apartment

1
New York City
7.40%
$3,210

2
Seattle
6.70%
$1,169

3
San Francisco
6.70%
$2,155

4
Oakland-East Bay, Calif.
7.60%
$1,579

5
Orange County, Calif.
5.30%
$1,758