Apartment Market’s Continued Recovery Reliant On Employment Market

While the US residential apartment sector appears to be recovering far faster than other sectors, much of this trend relies on increased stability in US economic trends. While …

While the US residential apartment sector appears to be recovering far faster than other sectors, much of this trend relies on increased stability in US economic trends. While vacancies nationwide are declining, some regions of the US continue to struggle with high vacancy rates. See the following article from National Real Estate Investors for more on this.

The apartment sector is poised to recover more quickly from the nation’s deep economic malaise than either the office or retail sectors, according to a new report by New York-based data research firm Reis.

The caveat, however, is that Reis’s projection for the multifamily market’s continued recovery assumes that the labor market will stabilize. In June, disappointing news related to hiring in the private sector raised concern that apartment and other commercial real estate fundamentals may not continue their recent positive trend.

Total nonfarm payroll employment declined by 125,000 in June, according to the Labor Department. That’s a step backward from May, when payroll employment rose by 433,000, an increase attributed mainly to the hiring of 411,000 temporary Census workers.

Still, the apartment sector is on a path toward recovery, and showed improvement in the second quarter, according to Reis. Vacancies fell from 8.0% in the first quarter to 7.8%, the first time in two years that the vacancy rate dropped. Net absorption rose by 44,199 units, the largest increase in 10 years, according to Reis.

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“Jobs numbers were slightly better in the first half of the year,” says Reis economist Ryan Severino. “People started to feel like things were going to get better and they could go out and lease an apartment.”

An increasing number tenants have found a job, or believe they will find one. Rather than continue to double up with family members or friends, they’re opting to go it alone as renters.

However, the fragile improvement in the apartment sector could be derailed if significant problems erupt in the jobs market. “If (upcoming) job numbers are disappointing, there’s always a chance we could slide back. But knock on wood, we’re cautiously optimistic that we’ve turned the corner and can move forward,” says Severino.

In the second quarter, more than two-thirds of the addition to occupied stock (70%) came from existing buildings leasing up empty units. Both asking and effective rents grew at a faster pace than in the first quarter, increasing by 0.4% and 0.7% respectively, according to Reis. The research firm believes that the apartment sector bottomed out in the fourth quarter of last year.

Rents on the rise

Not all markets are recovering at the same pace, of course. In New York City, the apartment vacancy rate declined slightly in the first quarter to a tight 2.8% compared with 2.9% in the fourth quarter, according to Reis. Second-quarter data has not yet been posted. Effective rents in New York grew by 0.9% to an average of $2,667 over the same period.

The story was much different in Houston where the first-quarter apartment vacancy rate rose to a whopping 12.9% from 12.3% in the fourth quarter. But effective rents grew on a quarterly basis by an encouraging 1.1% to $717.

In Chicago, meanwhile, the first-quarter vacancy rate dropped to 6.6% from 6.7% in the fourth quarter. Effective rents rose 0.5% to $975, after earlier declining by 1.3% in the fourth quarter.

Across the country, asking and effective rents grew at a faster pace in the second quarter than in the first quarter, and landlords cut back on concession packages.

The improving fundamentals stood in stark contrast to last year, when effective rents dropped 2.9%.

But Reis is cautious. “There is a risk with everything going on in the world that the economy might slide back a little bit,” says economist Severino. “But my baseline assumption, what I’m most hopeful about, is that we just keep on this slow, pedestrian economic recovery and that the real estate market will follow along with that.”

This article has been republished from National Real Estate Investor. You can also view this article at
National Real Estate Investor, a site covering commercial real estate news, trends, and research.

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