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Urbanite: The City That Rents?

March 01, 2012

More folks in Baltimore have landlords than mortgages. A passing byproduct of the housing bubble, or the new "un-ownership society" driven by Gen Y?

Consider this a tale of two city lots.

Exhibit A is in Pigtown, where the Camden Crossing housing development débuted with fanfare in 2006—a phalanx of suburbanesque, neo-colonial, garage townhomes blooming in a brownfield in the shadow of the old B&O Railroad roundhouse. Sales were brisk, and home prices passed the half-million mark.

But then the bubble burst, and Baltimore's median home price plunged more than 30 percent. Camden Crossing was caught uncompleted, and a December foreclosure auction of the remaining thirty-four home sites was only prevented at the eleventh hour when local developer Metroventures Properties got a financial lifeline from a new lender. On a recent afternoon visit nothing was stirring on the weedy lots save two men idly airing their dogs.

Exhibit B is but a couple of miles east, at the corner of Thames and Wolfe streets in Fells Point. Here nothing is idle, as a half-dozen pieces of heavy equipment noisily tear at the ground where the Bozzuto Group, a Greenbelt-based development and management firm, is putting up the $72 million Union Wharf project—281 apartments scheduled to take on tenants in 2013. And chances are if you hear construction noise or see hardhat-clad folks with blueprints under their arms elsewhere in town, look around for a sign reading "New Apartments Leasing Soon."

The crash-and-burn housing market and worst-since-the-'30s economic downturn left marks large and small on Baltimore. Among them, this: Baltimore is now a city that rents. A census data analysis by USA Today last June placed Baltimore among only some two dozen U.S. cities since 2000 to have slipped from majority homeowners to majority renters (52.3 percent of Baltimoreans rented in 2010, up from 49.7 percent a decade earlier, the analysis shows).

Just how dented is the American Dream of a white picket fence (or a shiny stoop) and a roof-of-one's-own in Charm City? Since the dollar-house days of the 1970s, Baltimore's boosters have looked to homeownership as a means to stabilize neighborhoods and bring in new blood, but now factors both economic and demographic, good and bad, come into play. College enrollment is at record highs, but so is tuition debt and unemployment among recent grads.

How long the headwinds against a return to homebuying will last is the crystal-ball question.

Presently, it's safe to say landlords are in the catbird seat. While home prices dipped another 4 percent in the region last year, rents were up at least that much, and depending on a unit's amenities and location, they spiked as much as 9 percent. Indeed, for the first quarter of last year, Baltimore was among the top ten cities for rent increases in the nation, according to industry analysis firm MPF Research. With few new rental units added during the years of frenzied house sales, the rule of supply and demand is working overtime. Southern Management, which owns and managers some 24,000 rental units in the mid-Atlantic—from 1960s-era garden apartments to swanky downtown office-to-apartment conversions, such as the Standard and 39 West Lexington—started the new year with a corporate-record 98.2 occupancy rate.

"The rental market is strong in these last few years because you have people who lost their home and have to live somewhere so they rent instead of own and a lot of young people with huge amounts of debt who don't know where they are going to end up landing—a job here or job on the West Coast?" says Darlene Harenberg, president of Charles Village's Star Property Management, which oversees some 500 rental units across town. "No one wants to be tied to a house right now,"

In such turbulent times, other, would-be homebuyers have decided to sit on the sidelines, opting to ink new rental leases while they wait for house prices to hit bottom and our economic storm clouds to clear.

The Live Baltimore Home Center, the 15-year-old nonprofit organization that markets the city and its neighborhoods to would-be residents—renters or owners—is on the front line of this rental shift. "We've noticed the apartment and rental based links on our website are seeing significantly more activity," says the group's executive director, Steve Gondol. "We're seeing people who could easily buy that are just choosing to rent."

Tom Bozzuto sees this, too. In fact, the Bozzuto Group's chief executive officer is banking on it with Union Wharf, which follows his firm's leased-to-the-hilt mid-town apartment complex, the Fitzgerald, which opened in 2010. Union Wharf joins a portfolio of Baltimore apartment complexes, either leased or owned, that include a pair of Harbor East high-rises and downtown's historic Munsey Building conversion. (Rents range from $1,200 to $2,300, and the Baltimore properties are 94 percent occupied.)

"I'm not one of these people who thinks homeownership has gone completely out of fashion—that's ridiculous," Bozzuto says. "I think what happened is that people now understand that owning a home is a lifestyle choice and not a economic investment. There are people renting from us now who might a few years back had been inclined to buy. Some are waiting out the market, but I also think there are people that are waiting until their lifestyle justifies making a home purchase."

In an off-the-cuff analysis of how his tenants have changed these past few years, Bozzuto believes they are now older (mid-'30s for the Baltimore properties) and have higher incomes and better credit scores. Given this, it's no wonder rents are increasing.

"I think during the last decade the percentage of homeowners moved to a level that had never been reached in our country and that probably wasn't justified," Bozzuto says. "Six years ago, a 28-year-old would have felt under pressure to go out and buy a condo as a way to make some money. I think today they understand that renting can be a very intelligent thing to do to maintain flexibility and not run the risk of housing prices staying flat or declining."

Deborah Ford, professor of finance and director of the real estate and economic development program at the University of Baltimore's Merrick School of Business, doesn't want to say the American dream of owning home is dying but does feel a more realistic view of homeownerships is entering people's minds. "It's a place to live, not an investment," she says. "It's not stocks and bonds, and I think in many cases unless you intend to stay there for a very long period of time you are probably better off renting."

Amy Weldon, a 26-year-old assistant trainer at the National Aquarium, loves city life from her home in Butchers Hill: free concerts in nearby Patterson Park, sunset on her roof deck, the easy commute. But she loves this all this as a renter, one of three roommates in a $1,525-a-month apartment.

"I really don't see me ever buying unless they start giving houses away," Weldon says with a chuckle. "I make so little that getting a mortgage is not realistic. This speaks maybe more to my field than my generation, but I think a lot of people are in the same boat. We're paying off student loans and don't have any extra cash."

There is, of course, a large boat brimming with financially strapped young people. It's called Generation Y. And many of them might look enviously at the $10,000 or so Weldon still owes Towson University, given that the average college debt for an undergraduate degree now tops $25,000, according to the Institute for College Access and Success. (There's been no bursting of the tuition bubble: College costs at public four-year institutions increased some 72 percent over the last decade, while private college price tags [usually much more to begin with] rose some 35 percent.)

There' s no hard-and-fast definition of Gen Y (a.k.a. the Millennials or Generation Next) and depending on where you place the born-between bookends, it's either the largest generation in American history or second only to the Baby Boomers. (Hence its other nickname: the Echo Boom.) It roughly refers to people born in the 1980s and early '90s, and there's more than 80 million of them. (Generation X—the Baby Bust—is around half as large.)

"Gen Y [over the next 10 years] is going to prefer renting for a myriad reasons, and if only half of them rent, that's still 40 to 43 million new renters," say Tim Smith, who spent years researching Gen Y for the banking industry and now runs the Echo Boom Bomb blog dedicated to the Boomers 2.0. "There are a lot of business opportunities for folks who want to be landlords."

Even without all the economic turbulence, when young adults form households they generally rent that first roof over their heads (not counting the some 25 percent that, according to Smith's surveys, are presently bunking down with mom and dad or other relatives). Add a dented view of homeownership as sound investment and studies showing Gen Y couples will be marrying both less and later in life, and you have a recipe for a longer-term renting trend.

"I think we are starting to see the American Dream return to entrepreneurship, like it was back in early 1900s," Smith says. "The American Dream wasn't to own your own home but to start your own business." (And so opening a gluten-free cupcake shop or launching a niche-market dot com businesses might be taking precedence over a welcome mat and a thirty-year mortgage.)

But as industry and academic folks poke and prod this generation's aspirations and mindset, mixed messages can appear. While a 2010 survey from Pew Research indicated that only 20 percent of adults aged 18 to 34 considered homeownership "important" in their lives, a survey released last fall from the real estate website Trulia reported that home ownership is still part of the "personal American dream" for 65 percent of adults in that group.

Either way, overall economic conditions and financial realities are likely to remain the key factor in dictating home buying decision-making. To keep the housing markets from overheating in the future, new federal regulations of the home loan industry are being considered that could require more homebuyers to put more money down up front, perhaps as much as 20 percent. Smith's research says the average Millennial has all of $1,500 at his or her disposal.

All this also means that if more people are renting—be it by choice or necessity—is it time to revisit the stigma renters sometimes get saddled with, especially in mixed owner-renter neighborhoods? If folks aren't even invested in a house, the reasoning goes, how or why would they be invested in the greater community?

"I get offended when I hear politicians or realtors talk about renters as if they are criminals," counters Bozzuto. "Renters are good citizens too."

Eli Lopatin, 29, encountered some renter prejudice when he had an apartment in Bolton Hill, where the homeowners rarely even spoke to him. It's been different since he moved to Reservoir Hill four years ago. One thing renters rarely have access to is land, but the neighborhood's Lennox Street Community Garden gave Lopatin a chance to get his hands dirty while putting food on the table. Now he's one of the garden's managers and engaged in the greater community as well, sitting on the board of Bolton Park Neighbors, a nonprofit neighborhood group. Perhaps the increasing interest in urban gardening and growing public spaces to pursue it can help more renters end their up-the-stairs isolation.

"If you have people who want to be engaged in a community it kind of doesn't matter if they are owners or renters," says Lopatin, a debt-saddled graduate student who won't be buying a house anytime soon. "There are still negative stereotypes about the renters, but if people meet you and see you want to be involved that can change. The overall feeling is that we need good residents, and whether those are renters or homeowner doesn't really matter as much."

Sometimes the problem is the landlord and not the tenant. The housing bust lead to a spike in foreclosures in neighborhoods such as Highlandtown and Patterson Place where speculator rehabbers—working off the popularity of Canton—had been flipping vacant or rundown rental houses for middle-class homeownership. Many of these foreclosures—including a large pool once owned by the bankrupt and defunct Patterson Park CDC­—ended up as rentals. Anthony Cataldo, who bought his Port Street home in Patterson Place six years ago, sees them right out his window.

"Some of the rentals are in terrible condition, and the landlords couldn't care less about them," Cataldo says. "They are getting almost $1,000 a month for houses that are in shambles but they won't sell because it's a cash cow. After a small rise in new homeowners the dream we had of absentee landlords selling their houses to a developer has been killed."

Or has it? Despite the numbers, projections, trends, and all the rest, its not hard not to find folks who remain bullish on Baltimore home buying. And if both the number of rental units and rents continue to rise, the market might tilt anew.

"I don't know If I'd call it a 'rental bubble,' but I think there is going to be a problem if we end up with too much rental on the market and not enough people," says Harenberg. "And the way they're building all these new high-rise rentals I think they might wind up like the condo market, where in one year there were some 5,000 permits for condos."

Rents for smaller row houses in southeast have actually edged downward, say realtors in Coldwell Banker's Inner Harbor office, while overall rents are going up. Supply and demand might be at work here, too, in spots.

"We're definitely starting to see more buyers in the business renovate and resell—they're not keeping the properties to rent," says Paige Cosgrove, a Coldwell Banker Branch Vice President. "We recently had a buyer who was 22, so very young homeowners are purchasing."

"There's no question that our work in the homeownership area has slowed," says Mark Sissman, president of Healthy Neighborhoods, a Baltimore group that connects house hunters with incentives and its own pool of below-market loans to encourage house purchases in more than a dozen targeted Baltimore neighborhood. "But we've got neighborhoods where prices dropped by 40 percent and interest rates hover around 4 percent—it's an awfully good time to buy. People are now making more thoughtful decisions. It's not about flipping a property these days but choosing a neighborhood where you want to stay. That's the right way for people to be involved with real estate."

A growing plethora of city and state home-purchase incentive programs now greet would-be home buyers, and there are private ones as well, such as Johns Hopkins' Live Near Your Work program, providing employees with up to $17,000 in closing cost assistance for houses bought near a Hopkins campus. Still, going forward, Sissman see the student debt issue as something that will need to be addressed. "There are so many young people coming out of school well educated, and they should be good borrowers, but the ratios don't work because of the student debt is just too big," he says. "Eventually the lending industry will have to accommodate that in some responsible way."

In the end, it's hard to imagine the emerging crop of 20 and 30somethings forever shying away from inking a mortgage. The city's diverse housing stock helps, as some "starter" row houses are really no larger than one-bedroom apartments. On the other end of the brick-and-mortar spectrum, some of the massive grand dame houses have been chopped into apartments. Perhaps the rush to return these to single-family living will slow, and buyers might choose to live awhile in one unit and rent out the others. And then down the road in D.C., the housing market is much healthier, and prices are actually creeping up. It just seems natural that more and more folks from that other beltway will be bringing their Washington paychecks northward in pursuit of Baltimore mortgages.

Renting can offer convenience, flexibility and—ostensibly—freedom from maintenance hassles and costs. But the truth remains that when you rent your roof it's not your own, and the "lord" part of "landlord" spells out your place in the pecking order.

After a decade of renting, 29-year-old David Llewellyn is ready to take the purchase plunge, driven by frustration as much as finances. Banks have seemed willing to work around his tuition debt, so now it's just a matter of finding where to settle. Someplace where he won't be forced to move open up his living space to strangers considering buying the building.

"We are just really tired of the renting situation," says Llewellyn, who does IT work for Social Security Administration and is getting married in May. "The past few places where we rented the owners ended up selling out from underneath us, so it's been hard to stay in one place. Rents are going sky high, and it's just frustrating. We just want a stable place to live."