Renters across the country may be able to breathe a sigh of relief in 2007 after three years of a landlord's market. In many areas of the country, occupancy rates and rents are expected to stabilize or, in some cases, even decline as the economy sputters along and more rental properties are added to the market.

In the fourth quarter of 2006, apartment rents averaged $983 across the U.S., up 2.8% from the same period a year ago -- a modest bump compared with the rent increases of the past few years.

Occupancy was down a full percentage point from the third quarter and unchanged from last year's fourth quarter, according to data from M/PF YieldStar, a market-research company.

"The fourth quarter is usually a seasonal lull for the apartment industry," M/PF Vice President Greg Willett says. But, he says, "the dip this year was significantly bigger than what we normally see."

'Shadow market' keeps down rents

In some areas, the smaller-than-usual increases can be attributed to a boom in apartment construction, which made thousands of additional units available. In areas such as Riverside, Calif., which has seen more than 10,000 units added to the market recently, landlords are offering move-in specials and other incentives to draw renters.

Occupancy in Riverside declined almost a full percentage point in the fourth quarter to 94.9%, but rents still inched up 2.5%.

Most affected, however, may be the areas where investors and developers made large bets on condominiums, such as South Florida, Washington, D.C., and San Diego. With home prices declining, many of these units are returning to the market as rentals, holding down rents for other property owners.

Apartment landlords call these conversions "re-partments" and the influx of new units "the shadow market" for the pall they cast over their own properties.

Just ask Jack Stasney, who owns several condo units outside Minneapolis. After trying unsuccessfully to sell a one-bedroom unit for about a year, he's now trying to rent it out for $630 a month, less than he had bargained for.

He blames competition from another owner down the street who has an entire building of renovated one-bedroom condos that are available for rent. "I used to rent it out for a lot more," Stasney said. "But if they bring down their price, what are you going to do?"

The average apartment rent declined 1.7% in Minneapolis in the fourth quarter to $911 while occupancy remained at 94.6%.

Florida's boom slows

Occupancy in Fort Lauderdale, Fla., and Miami declined 2.6 and 1.2 percentage points, respectively, while rents increased 2.1% in Fort Lauderdale and 4.5% in Miami. Though those rent increases may sound strong, Willett says, they were well shy of the area's 8%-to-10% annual increases of the past few years.

Memphis, Tenn., reported the biggest drop in performance in the quarter, as Hurricane Katrina evacuees began to move out of the city, dragging down occupancy 4.4 percentage points and rents down 3.8% to an average of $595.

Demand still high in West

Some cities in the West bucked the slowing trend as demand continued to outstrip supply. In San Jose, Calif., for instance, where a huge gap exists between renting and buying, apartment rents shot up 10.2% in the fourth quarter to an average of $1,493, even as occupancy held steady at 97.2%.

Likewise, apartment rents in Seattle climbed 9% in the fourth quarter to an average of $970, as occupancy increased slightly, from 95% to 95.8%.

Sarah Tinsley, a Tacoma, Wash., student and stay-at-home mother, says she has seen rents go up significantly just in the nine months she's been living in her one-bedroom apartment. She's now looking for a two-bedroom place for her, her Navy-enlisted husband and their 6-month-old son. But, she says, the $600 a month she can afford gets even less than it did when she moved into her current duplex.

"Most two-bedroom apartments just aren't in that range anymore," Tinsley says. She knows she's going to have to scale back her expectations to find a new place. She just hopes she won't have to move too far from her old neighborhood. "I've been looking for a month now," she says. "It's going to be hard to find something."

Apartment rents also continued to climb in cities such as Los Angeles, San Francisco and Phoenix, even as occupancy rates declined. But Willett says these gains were smaller than they had been in previous quarters.

• San Francisco posted a 7.2% increase in rents to an average of $1,742. Occupancy dropped from 97.2% to 96.5%.
• Rents in Phoenix climbed 4.6% to an average of $755 as occupancy declined from 95.5% to 94.7%.
• Los Angeles posted a 4% increase in rents to $1,540, even as occupancy dropped a percentage point to 96.2%.

In New York City, occupancy continued to tighten, to 97.7%, sending rents up 7.5% in the fourth quarter from the same period last year, according to Reis, a real estate analysis firm. (M/PF does not track the New York market.)

Still, Willett says, even as the rental market flourishes in certain urban pockets, there should be more vacancies hitting most markets, partly as a result of the struggles in the economy and as more investor-owned housing properties come on the market for lease.

"There are many condo projects that are still under construction," he says. "And a lot will come online as rentals rather than condos."

Landlords remain upbeat

Similarly, says Mark Obrinsky, the chief economist for the National Multi Housing Council, an apartment trade group, there may be more investor-owned detached homes that are put out for rent as investors find they can't flip them in short order.

The trouble is, he says, no one has a good idea of how many of these properties are coming back as rentals. And, he says, the economic picture and prospects for the housing market are so clouded right now, it's hard to tell whether this is just a short blip of a downturn in the apartment market or the beginning of a long-term trend.

"We'll need another quarter's data to try and fill in some of the blanks," Obrinsky says.

Landlords, for their part, aren't ready to cede control of the market to renters just yet, Obrinsky says. At his group's annual meeting recently in Phoenix, most landlords remained "relatively upbeat about 2007. They are not reading this as a sign that things are going downhill."