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Commercial Department: Property TypeCast: May 2015


Property TypeCast

Multifamily vacancy faces rising supply

The national multifamily vacancy ended 2014 at 4.2 percent, holding steady versus the prior quarter, and falling just 10 basis points year over year. This marks the slowest annual rate of vacancy compression since the recession. After a 20 basis-point decline in first-quarter ’14, we actually observed the first quarterly increase in vacancy since 2009. Still, prospects for multifamily in the near term remain positive thanks to favorable demographic trends. Apartment Net Absorption and Vacancy; Apartment Effective-Rent Growth. Source: Reis Inc.

Asking and effective rents grew 0.6 percent each in this past fourth quarter, the slowest quarterly growth registered in 2014. The fourth quarter tends to be a weak period for multifamily because most households choose to move in the warmer months of the second and third quarters. Year-over-year growth has been strong, however. National asking rents rose by 3.4 percent in 2014, the fastest rate of growth since 2007. Effective rents rose by 3.6 percent over the course of the year, which is up 30 basis points over last year’s figure.

We are now observing occasional instances of “creative” concessions being handed out quietly. Items such as gift cards are given to new tenants in locations as varied as the Pacific Northwest and Washington, D.C. These modes of lease concessions don’t necessarily show up in effective-rent calculations, but they are indicative of specific geographies now feeling the brunt of competition from new properties.

More than 160,000 units came online in 2014. Expectations were for an extra 20,000 units to be completed in 2014, but many projects were delayed in this past fourth quarter and will most likely hit the market early this year. This will swell an already substantial pipeline for 2015. We expect about 230,000 units will be completed in the 82 major markets tracked by Reis.

New construction remains the key issue for multifamily. The national vacancy rate has already ceased falling. In fact, it increased 10 basis points midyear before becoming flat in this past fourth quarter. With a large amount of new supply set to come online, vacancy is headed higher. Although subsequent years won’t reach the projected 2015 levels, the amount of new supply will still be significant. The supply pipeline swells larger and larger and presents the greatest risk to the health of the property type.

Several markets have substantial pipelines that are expected to change the landscape of those local markets’ economics. With vacancy rates projected to trend upward, rent growth will moderate in coming years. Although it will still be positive, it will not be able to sustain the pace of growth that occurred in 2014. The change will be gradual, but rising vacancy rates and slowing rent growth will limit net operating income (NOI) growth, which may even turn negative in submarkets where supply growth significantly exceeds demand.

This does not mean that demand will flag anytime soon, however. Although vacancy will begin to rise, the sector is not in a downward spiral. There are roughly 45 million people between the ages of 20 and 29 in the U.S., the overwhelming majority of whom are renters rather than homeowners. With the economy poised to perform even better in 2015, this will provide enough demand to keep occupancy from deteriorating significantly, although vacancies will rise from their current low levels.


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. Calanog and his team of economists are responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at Brad Doremus, senior analyst for Reis’ economics department, contributed to this article. Reach him at

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