Apartment Trends Q2 2013 Summary

Reis VP of Economics & Research, Dr. Victor Calanog, provides an update on the apartment sector performance for the 2nd quarter of 2013.

  • 13 quarter streak of declining vacancies came to an end in Q2 2013
  • 27,000 units came online in the second quarter
  • Asking rent grew by 0.6% while effective rent grew by 0.7%
  • East coast and California vacancy rates are tight

Apartment Trends Q2 2013 Video Transcription

Apartment vacancies remained unchanged at 4.3% in the 2nd quarter of 2013. That brings to an end a 13 quarter streak of vacancy declines since late 2009 when national vacancies peaked at 8.0%. Now that national vacancies are at 4.3%, that’s a 370 basis point decline since the peak of 8.0% in late 2009. This is to be expected, and we don’t think the sky is falling for the multifamily sectors since demand still remains fairly robust. We had about 27,000 units come online in the 2nd quarter, opening their doors as new apartment rentals. Supply growth is picking up, but absorption remained over 31,000 units, which means that as the market brought new units online it was also absorbing them fairly well. We think that at this point the vacancy rate is so tight, the 20 year average is at 5.4% and we are over 100 basis points below that, that you should see some tightening and far less of a vacancy decline as we experienced in the first 2 to 3 years of the recovery.

Asking and effective rents grew by 0.6 and 0.7% respectively. That’s a slightly faster pace than the first quarter of 2013. That’s not very healthy when you take a look at vacancies being as low as where they are. You should expect anywhere from an annualized rate of 4 to 5 % rent growth when you are at below 5% national vacancies, but what’s interesting about this dynamic is that we think landlords are steadily losing their pricing power given how expensive apartments have become. In many, if not the majority of markets, you have rent levels that are well beyond 2008 peaks. Given the fact that wage growth has been pretty mediocre, a lot of tenants are now paying well over 1/3 of their disposal income in rents. In turn, landlords are steadily losing their pricing power despite the fact that things are still really tight on the occupancy side.

New York vacancies are at 2.0%. In fact, there are 12 markets mostly in the East Coast and California with vacancies under 3.0%. Things are really tight for many markets in the apartment sector. We don’t expect a huge difference over the next few years despite the fact that we are projecting a rise in vacancies owing to a larger supply growth. There’s going to be a fairly large amount of new supply coming online this year and next. We are not projecting a contractionary period for the apartment sector, although, if demand remains strong you should still expect a slight ticking up of vacancies over time. The biggest wild card for the apartment sector right now is how the recovering housing market will impact demand for apartments. With mortgage rates beginning to rise and even home prices showing an upward trend over the last 6 to 12 months, will a lot of would be tenants who would have been renting make the jump and buy a home? Obviously, if you’re an investor in apartment buildings downtown where supplies are constrained, and people choose to live downtown for a reason, then maybe you don’t have to worry about that. However, for a variety of markets around the country, say Buckhead in Atlanta or Northern Virginia, where the trade from a rental to a single family home might be easy to do, you should expect a little bit of dampening demand because of the recovering housing market.