BusinessReport.com

While a healthy housing market and a healthy rental market aren’t necessarily mutually exclusive phenomena, the degree to which both are thriving in Baton Rouge is unusual. The rental market seems particularly poised to continue its growth, with tenants continuing to be at the mercy of escalating rents until new units can come online and increase market supply.

The latest best estimate regarding post-Katrina population influx into the Baton Rouge is 30,000 people, or roughly 11,000 new households. The initial strain of the new residents resulted in effectively full occupancy, where the market had previously hovered around a healthy 8% vacancy rate.

New complexes coming online in 2006 did little to dent the overwhelming shortfall. About 600 new units came online last year at apartment complexes such as University House at Highland (164 units), Sterling Northgate (92 units), phase II of The Venue at Northgate (21 units) and Regent Apartments (318 units).

Those new units caused only a minor blip on the vacancy radar, which now stands at 2.2% citywide. “We’re simply not at the point where we’ve provided enough incremental supply,” says Wesley Moore, a Baton Rouge appraiser with Cook, Moore & Associates. The area is trying to catch up, Moore says, but the time it takes to build an apartment complex—typically about a year—makes it difficult to meet the demand as quickly as the shortage was created.

The stress on the rental market was tempered somewhat over the last couple of years because of the affordability of owning a home. The monthly notes on a house weren’t significantly higher than the rent for apartments of comparable bedroom/bathroom numbers. The opportunity for gaining equity through home ownership made the choice to buy an appealing one for consumers with that option.

But more and more people previously on the fringe of being able to afford a house may find themselves being steered toward rental. As insurance costs increase and interest rates rise, the cost of ownership is becoming less competitive.

The dynamics of a population increase (one that is expected to continue in subsequent years provided a strong local economy) and the lessening affordability of ownership do nothing to help the supply shortfall. The result is a study in Economics 101—Baton Rouge has become a landlords’ market.

Rents are steadily rising, and potential renters will find it almost impossible to find any sort of incentives being offered to sign a lease. Spring 2006 saw the most significant jump in rent, particularly for two-bedroom units, which saw a rental jump nearing 12%. Three-bedroom units increased nearly 10%, while one-bedroom units increased about 8%.

Rents continued to rise in fall 2006, according to data compiled by Moore. Rentals for all three categories of apartments rose close to 6%, with two-bedroom units rising slightly less than the other two categories.

From spring 2005 to fall 2006, each of three rental categories saw market-wide rental increases of $50 to $100 a month. One-bedroom units had the smallest increase, going from an average of just more than $500 monthly to between $550 and $600. Two-bedroom units are averaging a tad more than $700 monthly after a spring 2005 average rental price that fell between $600 and $650. Three-bedroom units are beginning to near a $900 average after a spring 2005 average just short of $800 a month.

There are, however, some avenues that may help reduce the strain on the market. HUD offers a program where the department insures construction to permanent loans for apartments. Local mortgage broker Brian Andrews says it appears HUD sees some opportunities in Baton Rouge for the program. But HUD has maintained a stance that it doesn’t want the apartment complexes with its insured loans competing directly against each other. So the loans will be tougher to acquire once HUD has entered a specific geographic area.

One program that stands to have a more indirect impact on the area is the Low Income Housing Tax Credits, an incentive to bring affordable housing into a market. Under the program, the state is given a set amount of federal money to dole out as tax credits. This money is more likely to spent in the areas hardest hit by the 2005 hurricanes, so the effect on the market here will actually be the reduction of demand—residents returning to New Orleans—instead of a growth of supply.

Help is potentially on the way, with a number of projects currently under construction. More than 1,700 units in the market are under construction, with more than 2,300 more planned for completion by the end of 2008. If the projects all come online at the same time, Moore says there could a sort of fishtail effect, although the supply surge would be noticeably less of an impact than the sudden, post-hurricane demand.

But builders are being met with the same increased insurance costs that are driving potential homeowners out of the housing market. This expense stands to halt some construction projects, particularly if passing the cost to tenants creates non-competitive rental rates. “If the owner of the property isn’t getting enough income to pay for expenses, plus get a reasonable return, they’re not going to do it,” Andrews says.