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Commercial Department: Property TypeCast: June 2014


Property TypeCast

Demand for apartments remains resilient

The national apartment vacancy rate fell by 20 basis points in the first three months of 2014, ending the quarter at 4 percent. Much like many sectors of the economy, the sector was severely bludgeoned by the recession, with vacancies breaking Reis’s three-decade high in late 2009 as levels peaked at 8 percent. That historic level has now been cut by half, and is 140 basis points below the long-term average of 5.4 percent.

Net absorption remained healthy, despite dire predictions of a slowdown in hiring and household formation because of an unusually cold and prolonged winter. The sector absorbed 41,881 units, down slightly versus the previous quarter’s 48,325, but nonetheless the strongest figure for a first quarter since 2011. Completions in this past first quarter totaled 25,745 units. This is a pullback from the previous quarter’s 45,203 units, although inclement weather may have caused some delays. Construction is still on an upswing, with close to 130,000 units coming online this past year. Bad weather is likely to delay, but not cancel, projects. Reis expects significantly more units to be delivered in 2014, with most projects coming online in the latter half of the year.

Demand and rental rates

Rents are continuing to increase, but at a relatively subdued pace given how low vacancies have dipped. Asking and effective rents grew by 0.5 percent and 0.6 percent, respectively, in this past first quarter. These represent a slight slowdown relative to the previous quarter, and are the weakest rent-growth figures since first-quarter 2013. On a year-over-year basis, asking rents grew by 3.1 percent and effective rents grew by 3.2 percent.Apartment Vacancy and Net Absorption; Multifamily Effective-Rent Growth

Rent growth remains relatively weak given the fact that the apartment market is enjoying a 96 percent occupancy rate. Reis historical data suggests that at comparably low vacancies, rent growth ought to be roughly 100 basis points higher. The recovery of apartment fundamentals has been stellar, but it is still constrained by macroeconomic realities. In past periods when the national vacancy rate fell near 4 percent, the economy and labor markets were far stronger, generating income growth. Buoyed by a weak for-sale single-family housing market and enjoying favorable demographic trends, multifamily-rent levels are now well beyond 2008 highs for each of Reis’ more than 800 submarkets.

In the most expensive cities like New York, a large share of households are estimated to devote anywhere from more than a third to about half of their income to rents. Meanwhile, median household wages have been stagnant. Unless landlords are catering exclusively to the richest segments of the rental market, double-digit annual rent increases now have become much more difficult to extract.

In fact, we may have passed the peak for rent growth: Effective rents increased by 3.9 percent in 2012 but only by 3.2 percent in 2013. These chinks in the seemingly otherwise-impregnable armor of multifamily fundamentals are appearing at the metro level. The number of markets (out of 82 primary markets) with increasing effective rents declined from 82 in the latter half of 2013 to 74 in the current period, reflecting these macroeconomic constraints.

West Coast metros grow

New Haven, Conn., was the tightest market in the country, boasting a 2.3 percent vacancy rate. A number of California markets are quickly gaining ground, however. San Jose, San Diego and Riverside/San Bernardino all boast vacancy rates marginally higher than New Haven but are experiencing greater vacancy compression. In another quarter or two, it is highly probable that many of these metros will overtake New Haven as the tightest market in the country.

New York slid down the list, despite having only a 2.8 percent vacancy rate. It is the seventh-tightest market in the country, but record-high rents appear to be preventing occupancies from improving further. As of this past first quarter, effective rents in New York were $3,115 per month, a hefty 43 percent premium over San Francisco, the second-most expensive market. Thirteen markets now boast a vacancy rate lower than 3 percent. Of the top markets, 63 out of 82 registered a vacancy-rate decline in this past first quarter, while 74 markets boasted positive effective rent growth. The strength of the apartment market remains broad-based and pervasive, despite the prior points about decelerating rent growth. All of this stands in stark contrast to property types like the office and retail sectors, which are going through a far more limited and concentrated recovery, driven only by a handful of markets.


Over the next four years, Reis expects a moderation in rent growth in line with the softening recorded between 2012 and 2013. This does not mean that multifamily fundamentals are set to weaken, but that overly optimistic projections relying on double-digit net-operating-income growth over a five-year holding period need to be reassessed.

Brad Doremus, senior analyst for Reis’ economics department, contributed to this article.


Victor Calanog is chief economist and senior vice president for research at Reis Inc. ( He 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

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