Rental Demand Soars In First Quarter For US Apartment Sector

Despite unprecedented high vacancy rates across the US, the apartment sector posted its strongest absorbtion levels in a decade, maintaining levels instead of losing ground in this traditionally …

Despite unprecedented high vacancy rates across the US, the apartment sector posted its strongest absorbtion levels in a decade, maintaining levels instead of losing ground in this traditionally slow period. The trend in rising landlord concessions is starting to reverse, and job market strides should carry over into rents as the apartment sector leads real estate recovery. See the following article from National Real Estate Investor for more on this.

In a surprising show of resiliency for the U.S. apartment sector, the national vacancy rate stayed flat at 8.0% in the first quarter, bucking the seasonal weakness in demand that apartment rentals have typically shown during the colder months of the year.

Although a steep ascent in rents over the near term is unlikely, the multifamily market appears to be on the cusp of recovery. If so, pricing and transaction activity will rise and the window of opportunity for landing good deals may close soon.

Still, the national vacancy rate for the multifamily market remains at a record high level. The closest comparable vacancy level during the 30 years that Reis has been tracking the industry was 7.8% in 1986. However, other performance data on net absorption and rent growth, taken in the context of stabilizing labor markets, do support the outlook that the apartment sector is on the path to recovery.

Renter demand soars

More than 20,000 units were absorbed in the first quarter of 2010, according to Reis, making it the strongest level of absorption in any first-quarter period over the last 10 years. That’s particularly encouraging because the first and fourth quarters usually experience seasonal weakness in demand for rental properties. Most households make decisions to move and lease new apartments during the second and third quarters.

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We believe that the ferocity of the Great Recession may have wreaked havoc on traditional seasonal patterns. As labor markets started to stabilize late last year, households began to rent new space. People who had been looking for jobs for months — if not years — began landing positions in the first quarter of 2010.

The result was an improvement in property fundamentals. Asking and effective rents posted mild increases in the first quarter, rising by 0.1% and 0.3% respectively. The faster rise in effective rents versus asking rents implies that concession packages are no longer increasing, and may in fact be tightening. This is welcome news for landlords after what transpired in 2009, when asking rents fell by 2.3% and effective rents fell by 2.9%, both record annual declines, according to Reis.

The fact that rents haven fallen by record amounts is a strong indication that landlords have been more than willing to accommodate financially beleaguered tenants. Now that the labor market is on the upswing, rents can only go up from their current levels.

Not out of the woods

Despite signs of a turnaround, we believe that this recovery is going to be slow and fragile. With new properties still coming on line through 2010, private sector hiring needs to proceed at its current, generally positive, pace. Otherwise, the second and third quarters could be punctuated by rent declines that also go against expectations of seasonal strength.

Not every single measure of performance was positive in the first quarter. Newly completed properties came on line more than half empty. More than 22,000 new apartment units opened their doors in the first quarter at an average vacancy rate of 52.8%. Vacancy levels increased in 30 out of 79 markets, even if national vacancies remained flat.

Still, the first-quarter results taken as a whole are consistent with our expectation that the apartment sector will be the first to recover as the overall economy emerges from the recession. We already saw an uptick in pricing and property sales in the fourth quarter of 2009.

Indeed, capitalization rates fell from 7.6% in the third quarter to 6.9% in the fourth quarter. Some $3.76 billion of multifamily properties traded hands in the fourth quarter, up 32% from $2.85 billion in the third quarter.

If real estate fundamentals continue to improve in lockstep with overall economic recovery, the window of opportunity for finding great deals may soon close.

Victor Calanog is director of research for New York-based research firm Reis Inc. His monthly column delivers up-to-date assessments and expert analysis of real estate fundamentals.

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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