Multifamily hasn't run out of steam

Victor Calanog, vice president of research and economics, Reis Inc.

As published in Scotsman Guide's Commercial Edition, May 2012.

In this past February’s column, we discussed why the apartment sector’s robust recovery might experience a slowdown. This past fourth quarter provided reassurance that multifamily properties weren’t quite done yet with their bull run: Vacancies dipped by 40 basis points to 5.2 percent.

In just two years after hitting an all-time high of 8 percent at the end of the tumultuous 2009, vacancies have not just recovered, they have surpassed previous lows. At 5.2 percent, vacancies are now below the cyclical trough of 5.5 percent last observed in late 2006 — before the travails of the single-family for-sale housing market prompted apartment occupancies to begin deteriorating. In fact, the last time national vacancies approached this level was about a decade ago in late 2001.

The net increase in the amount of occupied space also experienced a slightly surprising jump this past fourth quarter, with close to 51,000 units leasing up. The fourth quarter tends to be a weaker leasing period, given that most households make moving decisions in the second and third quarters, but the apartment sector exceeded expectations once again, ostensibly because of heightened economic activity in the last three months of the year. U.S. manufacturing expanded this past December at its fastest rate in six months. Annualized gross-domestic-product (GDP) growth of 3 percent was the high point of the year.

National asking and effective rent growth, although positive, represents perhaps the only disappointing figures for the apartment sector in 2011. Reis expected rent growth in 2011 to be in excess of 4 percent, but subsequently had to ratchet down forecasts as the year progressed.

What happened? First, the biggest factor was grindingly slow economic growth. Macroeconomic forecasts had GDP growing by 3.5 percent to 4 percent earlier in the year, but the actual numbers came in at 1.7 percent. Second, this environment of slow economic growth created a situation where the rising tide for apartment properties did not lift all boats equally. Higher quality properties in the most desirable locations posted rent gains in excess of 5 percent to 10 percent, while Class-B and Class-C properties catering to lower-income tenants found it relatively more difficult to raise rents.

Finally, given how rents and occupancies are jointly determined, it can be argued that relatively modest rent growth at the national level helped buoy the robust improvements in occupancies and absorption. With the economy and labor markets recovering at a painfully slow rate, runaway rent increases could have stalled vacancy declines.

There is substantial risk of supply growth outstripping demand for rentals, given the large number of multifamily starts and projects being planned for delivery, but this probably won’t transpire until 2013. Also, demand for rentals will remain strong as long as the housing market remains in the doldrums.

The apartment sector has been the best performing property type in commercial real estate for the past two years, supported by falling homeownership because of the continuing travails of the for-sale housing market. Unless we enter another contractionary phase because of troubles in Europe or elsewhere, Reis expects vacancies to continue to decline this year, and asking and effective rent growth to accelerate, particularly when vacancies dip below 5 percent.

 

Victor Calanog, vice president of research and economics at Reis Inc., writes a monthly column on property types for Scotsman Guide. He and his team of economists are responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at victor.calanog@reis.com.

Eric Mingione, team leader for Reis’s quality control department, contributed to this article.