Friday, May 07, 2010

NMHC Quarterly Survey: Apartment Market Conditions Tighten

by Bill McBride on 5/07/2010 04:00:00 PM

From the National Multi Housing Council (NMHC): Apartment Industry Shows Widespread Improvement According to NMHC Quarterly Survey of Market Conditions

The Market Tightness Index, which measures changes in occupancy rates and/or rents, rose sharply from 38 to 81. This was the highest figure in nearly four years. Fully 64 percent of respondents said markets were tighter (meaning lower vacancies and/or higher rents). Only two percent reported looser markets. This is the sixth straight increase for this measure.
...
“We saw a sharp increase in the Market Tightness Index, which fits with the surprisingly strong (for a seasonally weak period) effective rent growth. ... Even so, a sustained recovery in the apartment market needs a firm economic and demographic foundation ... in the near-term the industry’s prospects still depend upon a stronger rebound in both the job market and household formation.” [said NMHC Chief Economist Mark Obrinsky]
Apartment Tightness Index
Click on graph for larger image in new window.

This graph shows the quarterly Apartment Tightness Index.

A reading above 50 suggests the vacancy rate is falling. Based on limited historical data, I think this index will lead reported apartment rents by about 6 months to 1 year. Right now I expect BLS reported rents to continue to decline through most of 2010.

This data is a survey of large apartment owners. The data released last week from the Census Bureau showed a 10.6% rental vacancy rate for all rental units.

A final note: at some point the apartment market would start to tighten from the very high vacancy rates (record levels according to the Census Bureau and Reis).

The question asked was:
Q: [O]n balance, apartment market conditions in your markets today are:

Of those surveyed, 64% answered: "Tighter than three months ago" and 34% answered "About unchanged from three months ago". So it appears the bottom in vacancy rates was reached in Q4 2009.

The improvement in the labor market is probably leading to more household formation - and combined with a record low number of new apartment units being completed this year - the apartment market is now starting to tighten. It will take some time for the overall vacancy rate to fall to normal levels, but the excess housing units are now being absorbed. (See Housing Stock and Flow for an analysis of the absorption of excess housing units).