First-quarter data show that the relentless pace of recovery in the apartment rental sector was not stymied by typical seasonal weakness, nor by an unusually high snowfall that might have prompted fewer households to move, according to Reis, a commercial real estate research provider. National vacancies fell by 40 basis points, from 6.6 percent to 6.2 percent, as the sector posted positive net absorption of more than 44,000 units. This is the largest increase in occupied stock in a Q1 period since 1999.
What is significant about these strong absorption numbers is the fact that it is occurring in the midst of a dearth in new completions. Usually strong absorption numbers are accompanied by a surge in new supply, but with few projects having start dates in 2009, only a little more than 6,000 units opened their doors in Q1 2011. This is the lowest quarterly figure on record since Reis began publishing quarterly data in 1999. All this implies that existing properties are driving the extremely strong lease-up figures.
The nation is now seeing the results of a sharp convergence of positive factors for apartment rentals. First, as labor markets continue to improve and hiring picks up, demand for housing is increasing, particularly in the 20-to-34-year-old segment of the labor market. However, with the single-family home sales market still on the ropes, and with deflationary expectations for home prices for at least the coming year, few of these newly hired young workers have the appetite to commit to buying a home, particularly since they may also want to wait until they’ve had some tenure with their current employer before cutting a check for the down payment.
Finally, with a shortage in new supply for 2011, Reis expects vacancies to continue to plummet throughout the year as households favor the rental market. The expected inventory growth figure of 0.5 percent in 2011 is about one-third of the long-term average of 1.46 percent, and any boost from new construction will not materialize until late 2012. Note, however, that reports from lender clients in late 2010 and early 2011 already indicate a surge in applications for the financing of construction and development of new multifamily buildings.
Occupancy improvements are well under way, but what about the ability of owners to raise rents? Increases in asking and effective rents of 0.4 and 0.5 percent, respectively, indicate that the strength of the recovery is making its way into greater pricing power on the owners’ part. Typically, recoveries are had in space markets first when vacancies begin to tighten, with owners hesitant to raise rents too quickly. However, rents increased in every single quarter of 2010 as owners rapidly took away concession packages in anticipation of an improving labor market and a recovering economy.
Over the course of 2010, concession packages that included three to four months off of 12-to-15-month leases were whittled to half a month or only one month’s worth of free rent.
Unless shocks to the global economy such as fiscal uncertainty in Europe or continuing challenges related to the Japan earthquakes truly dampen U.S. economic recovery and job creation, expect vacancies to continue declining and rents rising through the rest of 2011 at an even faster pace.