The U.S. housing market is only now beginning to recover from years of stagnating transaction levels and falling prices, and it was during this time that investors and developers scrambled to capture a piece of the rise in rental action. Ironically, many projects that were started during the real estate market exodus are now opening just as people start moving back to home purchases. Apartment demand is still rising and supply remains short, but market observers are certain that the sheer amount of units becoming available in the near term will far outpace the amount of people seeking rent in the larger markets. For more on this continue reading the following article from TheStreet.
One of the biggest upsides to the downturn in housing has been a surge in demand for apartments.
Whether burned by foreclosure or afraid of losing money in homeownership, Americans have run in droves to rent. That resulted in a strong rise in rents and a big drop in vacancies over the past few years, as investors rushed to build more supply. Now, just as that supply is about to come on line, demand appears to be weakening.
Apartment vacancies fell by just ten basis points in the third quarter of 2012, from 4.7% to 4.6%, according to Reis Inc. While that is still an improvement, it is the slowest rate since the recovery began in 2010; vacancies fell by an average 35 basis points every quarter from 2010 and 2011.
"Demand for apartments still clearly outstrips supply growth, with absorption figures higher than construction, and vacancies declining. Still, there is cause for concern in the near-term that demand is abating for multifamily, just as a veritable avalanche of new projects begins to open their doors early next year," notes Reis economist Victor Calanog.
The change in occupied apartments also slowed to the lowest rate of absorption since the first part of 2010 and represented less than half the quarterly average of the past two years. This is particularly concerning, given how many new apartments are under construction and scheduled to open in the next two years. Multi-family housing starts were up 37% in August from a year ago, according to the U.S. Department of Commerce.
Claim up to $26,000 per W2 Employee
- Billions of dollars in funding available
- Funds are available to U.S. Businesses NOW
- This is not a loan. These tax credits do not need to be repaid
Reis estimates that accounting for delays and cancellations, between 160,000 and 200,000 new units will open in 2013. In 2014 that "total" figure (not adjusted for delays) exceeds 320,000. That is in the 79 markets it tracks, where only 41,000 or so units were built in 2011. The average annual figure from 2001 to 2008 was about 120,000.
Many analysts still believe apartment demand will remain robust in the near term, relative to where it has been historically, as so many potential home buyers are shut out of the mortgage market due to damaged credit. They also point to a shift in the homeownership mentality of younger Americans, who have seen what the housing crash did to their parents and who are gravitating more and more to urban centers.
"Renting an apartment offers extreme flexibility in today’s techie generation and offers sociability," says Alexander Goldfarb of Sandler O’Neill. "It’s huge how much kids want to be with other kids, and apartments lend themselves well to that. We are not seeing a sudden wave of people moving out to buy homes, even though housing is finding a floor."
In fact, Goldfarb says the move-out rate is now at 16%, below the historical average of 20%. The biggest issue for the big apartment REITs, like Equity Residential (EQR), Avalon Bay (AVB), Essex (ESS) and Camden Property Trust (CPT) , he adds, is slowing growth rates. The stocks themselves are down and underperforming because investors expected this to be the peak year for the sector.
"Does that continue or do other trends boost them?" asks Goldfarb. "When you look at absolute growth rates, it will look very good relative to other sectors, and that will bring investors back to apartments."
Goldfarb does not believe that the burgeoning single family rental market is taking share away from the multi-family sector, but others say it could play a role, especially for lower income families looking for more space. Investors in some of the hardest hit housing markets have been buying up as many distressed properties as they can find, citing new demand.
"I see unprecedented demand, more than I’ve ever seen in 15 years," says James McClelland, CEO of Chicago-based MACK Companies, a rental property investment group. "Our waiting list is already up to 4 months. if you pass our criteria to become one of our renters you get the honor of sitting on a four month waiting list until the next home is available to you."
The housing market may be recovering, but it is far from a robust recovery, and the lessons learned in the latest crash will likely keep rental demand high. Given where other commercial sectors are with vacancy rates, apartments are still the healthiest; it remains to be seen what all the new supply will do to the fundamentals over the long term. Analysts say 2014 is the year to watch.
This article was republished with permission from TheStreet.