Multifamily vacancies continue to decline

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

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

In this past May’s column, we noted how multifamily has yet to run out of steam, predicting that the vacancy rate would continue to drop this year. Vacancies dipped by 30 basis points this past first quarter alone, ending at 4.9 percent. This is only the third time in Reis’s 32-year history that national multifamily vacancies have fallen below 5 percent.

Leasing activity showed little signs of slowing in the colder months from January to March, partly because of a relatively mild winter in the Northeast. Net absorption, or the net change in occupied stock, remained strong, with 36,448 units leasing up.

Although job creation began to show signs of slowing down by the second quarter, job growth was relatively robust in the first quarter. In line with this slow improvement in the overall outlook, households are continuing to flock to rentals as expectations of single-family home prices remain flat over the next year or two.

National asking and effective rent growth remained healthy, with effective rents (asking rents net of concessions) increasing at their fastest pace since the end of 2007. Asking rents grew by 0.5 percent and effective rents increased by 0.9 percent this past first quarter. Reis expects effective rent growth to accelerate even more as vacancies tighten within the 4 percent band; with availability so scarce, landlords have little incentive to offer concessions, and the gap between asking and effective rent levels is narrowing very quickly.

With demand for rentals benefiting from the continued moribund state of the for-sale housing market, tight supply conditions are helping boost the performance of apartment properties across the nation. Only 7,342 apartment units came online this past first quarter; this is the lowest quarterly figure for new completions since Reis began publishing quarterly data in 1999.

Risks may manifest later in the year, however. With multifamily remaining one of the few shining stars in commercial real estate, developers have begun building properties to take advantage of rising incomes. Unless there are delays, Reis expects about 70,000 units to come online this year. That is about double the rate of supply growth in 2011. Even more units are slated to come online in 2013 — somewhere in the order of 150,000 to 200,000 units in the 79 main markets that Reis tracks.

There is much uncertainty, however, as to whether construction delays or relatively tight financing will mean a more measured pace for supply additions. Developers tend to be optimistic about completion dates, but often miss targets, particularly if deadlines are more than a year off. Still, there are some metros that lenders and investors will want to monitor closely, given near-term projections for new construction.

Analysts will want to examine both the absolute change in inventory — the number of units projected to come online — as well as supply growth relative to long-term annual averages. Metro areas — like Seattle; Austin, Texas; suburban Maryland; and Washington, D.C. — stand out for absolute and relative measures of risk in supply growth.

Although increased supply growth need not push apartment fundamentals back into recessionary territory, it is important for individual investors to consider how greater competition in specific submarkets caused by the proliferation of apartment rentals will impact their portfolio’s performance.

Reis projects that vacancies will hover below 5 percent for the next few years, but rent growth will peak this year. That does not mean rent growth in subsequent years will be negative, but expectations, given the absence of tight supply conditions, probably should be tempered.

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.

Dan Quan, head of quality control at Reis, contributed to this article.