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Demand for apartments remains strong four years after the recovery began, even as construction activity has gradually increased. Not even the seasonal weakness normally observed during the fourth quarter had much, if any, impact on market dynamics. Vacancy in the sector declined by 10 basis points during fourth quarter to 4.1 percent, in line with the 10 basis point decrease in vacancy recorded during the quarter prior. Over the course of 2013, the national vacancy rate fell by 50 basis points and now stands 390 basis points below the cyclical peak of 8.0 percent, recorded right after the recession in late 2009.

Shrugging off the aforementioned seasonal weakness, demand for apartments remained resilient. In the fourth quarter, the sector absorbed 50,627 units, the largest number since the fourth quarter of 2010. During full-year 2013, almost 165,000 units were absorbed, ahead of 2012’s number but below the incredibly robust demand of 2010 and 2011.

Supply rose substantially in the fourth quarter, with 41,651 units coming on-line. This is the highest quarterly total in 10 years (41,995 units were delivered in the fourth quarter of 2003). This spike was not unforeseen. As Reis has been warning for the last few quarters, inventory growth is clearly on an upswing. Roughly 127,000 units were delivered during 2013. Though this represents the highest annual total since 2009, deliveries of new units have been consistent with the long-term historical average. Four years after the advent of a recovery in the apartment market, newly completed units continue to be absorbed.

A slight tapering

Asking and effective rent growth for the quarter, and for 2013 as a whole, paints a less rosy picture for the sector’s near term prospects. Asking and effective rents both grew by 0.8 percent during the fourth quarter. This is a minor decrease from the third quarter, but still up from the lull in rent growth that the market experienced in the first half of 2013, when asking and effective rents only grew by approximately 0.6 percent per quarter.

Nevertheless, rent growth for 2013 came in below rent growth in 2012. Effective rents, for example, grew by 3.9 percent in 2012, but only by 3.2 percent in 2013. Given a vacancy rate that is over 100 basis points below the 20-year average, rent growth this low is unprecedented. In prior historical periods when vacancies dipped below 5 percent, rent growth was at least 100 basis points above current growth rates on an annual basis.

Although the labor market continues to convalesce and household incomes remain stagnant, landlords may have pushed rent increases over the last three to four years to the limit of what tenants are willing to pay. On a nominal basis, rents are at historically high levels, which is also constraining tenants' ability to pay higher rents in many markets.

Rent growth remains pervasive

New Haven, Conn. remained the tightest market in the country with a 2.2 percent vacancy rate. New York, formerly the tightest market, endured some softness for the second consecutive quarter, with vacancies rising to 2.7 percent. New York now resides in fourth place by this metric. Twelve markets have a vacancy rate below 3.0 percent, while the tightest, most expensive markets continue to be those on the coasts, benefiting from relatively constrained supply growth and expensive for-sale housing.

Overall, the results for 2013 highlight the pervasive nature of the apartment market recovery. There are a few notable exceptions. For example, two of the three markets with effective rent declines, suburban Maryland and suburban Virginia, are contending with the fallout from political brinkmanship and federal spending cuts while supply is ramping up to historically high levels.

However, consider how markets performed over the entire year. None of Reis’s primary 82 markets experienced a decline in asking or effective rent growth; only 12 posted rising vacancy rates. Of those 12, only one, Little Rock, Ark., had a vacancy rate increase greater than 1.0 percent. Eleven markets had asking rent growth greater than percent over. While national rent growth remains modest, given low vacancy levels, there are a number of markets where rents continue to spike up, including Seattle, San Francisco, San Jose, and Oakland-East Bay.

Vacancy at a standstill

The apartment market has been on quite a tear over the last four years, with demand remaining strong despite dire predictions about a recovering for-sale market and how it could dampen demand for rentals. With the economy and labor market expected to improve in 2014, will great performance for multifamily properties continue?  The substantial increase in construction activity dampens the outlook somewhat for 2014. Completions next year should total more than 160,000 units, roughly one-third greater than the long-term historical average for annual completions.

Demand will not implode, but will struggle to keep pace with escalating completions. Therefore, we anticipate that for the first time since 2009 the national vacancy rate will not decline in 2014. Reis projects that the vacancy rate in the multifamily sector will remain stagnant between year-end 2013 and year-end 2014. However, still low vacancy, an improving economy and labor market, and a large number of newly completed class-A properties, will all likely push asking and effective rents up by more than 3 percent in the next year.

Brad Doremus is Senior Analyst, and Victor Calanog is head of research and economics, for New York-based research firm Reis.

This article was republished with permission from National Real Estate Investor.