Rent cuts dominate multifamily

Victor Calanog, director of research, Reis Inc.

As published in Scotsman Guide's Commercial Edition, May 2009.

In January's column, we cautioned brokers about being optimistic about multifamily buildings, citing increased pressure for landlords to offer concessions. There was merit to that warning: We now know that apartment-rental units were not spared from the economic upheaval in the final three months of 2008.

Net multifamily absorption for the fourth quarter of 2008 turned negative, with the market giving up more than 13,000 apartment units and pushing the national vacancy rate to 6.6 percent, 40 basis points greater than the third quarter. This represents a 90-basis-point increase in vacancies since the end of 2007 and a 110-basis-point increase since the sector's cyclical low of 5.5 percent in the third quarter of 2006.

Multifamily completions throughout 2008 proceeded at a uniform pace, with 24,226 units coming online in the fourth quarter. This is close to 2008's quarterly average of 24,119 units.

Occupancy did decrease in 66 of Reis' primary 79 metropolitan areas; effective rents declined in 59 of the 79 markets. At the national level, effective rents dropped by 0.4 percent, cratering faster than asking rents, which decreased by 0.1 percent. This likely indicates an increase in concessions in the fourth quarter.

Perhaps more worrisome than average-rent figures is the number of properties that actually featured rent cuts. Almost half of all apartment properties nationwide lowered asking rents between the third and fourth quarters of '08. This is a historical high since Reis' reports began in 1999; quarter-on-quarter declines increased from 5 percent to around 20 percent in 2002, nowhere near the 50-percent mark we are approaching.

Continued weakness is expected in the sector through the end of this year, with recovery depending on positive job growth.

The silver lining in this current cloud of uncertainty is the fact that landlords' willingness to lower rents quickly may prevent further occupancy deteriorations. In the previous downturn earlier this decade, vacancies increased from 3.2 percent in 2000 to 7.2 percent in the middle of 2003. In this downturn, we expect vacancy increases to be limited to about half this value.

Victor Calanog, director of research at Reis Inc., writes a monthly column on property types for Scotsman Guide. As head of Reis' core economics team, he is responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at victor.calanog@reis.com. Naimur Rahman, senior analyst for Reis' technology department, contributed to this article.