More ugly records for multifamily rents

Victor Calanog, director of research, Reis Inc.

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

In May's column, we advised brokers to be wary of multifamily properties, considering the distress they experienced in the final three months of 2008. That distress worsened in the first three months of this year.

Nearly 32,000 units became vacant in the first quarter of this year, pushing the national vacancy rate to 7.2 percent. That is a 60-basis-point increase from the fourth quarter of 2008. It also represents a 120-basis-point vacancy increase from the first quarter of 2008 and a 170-basis-point jump from third quarter of 2006, which saw a cyclical low of 5.5 percent.

For perspective, this is the largest amount of negative net absorption the multifamily sector has incurred since the first quarter of 2002. Vacancy levels haven't been this high since the first quarter of 2004, after which rates fell again.

But for many metropolitan areas, we could be only at the beginning of the current downturn because asking and effective rents only turned negative in the fourth quarter of 2008.

In this year's first quarter, asking and effective multifamily rents continued their precipitous decline, with asking rents falling 0.6 percent and effective rents 1.1 percent. Negative effective-rent growth outstripped negative asking-rent growth as landlords offered more concessions.

We have observed larger quarterly declines in effective-rent growth before, particularly in the two quarters following Sept. 11. The quarterly asking-rent decline, however, is the largest such decline for multifamily since Reis began reporting quarterly performance data in 1999.

A decline in asking rents implies that landlords are lowering the offering price even before negotiating further concessions with tenants. It is indicative of the increased pressure apartment properties face to maintain occupancy levels amid economic turmoil.

With more than 100,000 apartment units forecasted to come online this year, signs point to more difficulty for rental apartments for the rest of the year unless economic conditions improve drastically. With analysts projecting recovery in early 2010, rather than late this year, the question is whether rents have fallen quickly and substantially enough to warrant a healthy spring leasing season despite the general economic malaise.

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. Kyle McLaughlin, analyst in Reis' economics department, contributed to this article.