by Bill McBride on 10/01/2013 08:31:00 AM
Tuesday, October 01, 2013
Reis reported that the apartment vacancy rate declined in Q3 to 4.2% from 4.3% in Q2. In Q3 2012 (a year ago) the vacancy rate was at 4.7%, and the rate peaked at 8.0% at the end of 2009.
Some data and comments from Reis Senior Economist Ryan Severino:
Vacancy declined by 10 basis points during third quarter to 4.2%. Although vacancy compression has clearly slowed over the last few years, the decline of 10 basis points is an improvement versus last quarter when vacancy was unchanged. Over the last four quarters national vacancies have declined by 50 basis points, on par with last quarter's year‐over‐year decline in vacancy. More so than the magnitude of the vacancy compression, the simple fact that vacancy continues to compress despite such low vacancy rates speaks volumes about the ongoing demand for apartments. The national vacancy rate now stands 380 basis points below the cyclical peak of 8.0% observed right after the recession concluded in late 2009.Click on graph for larger image.
Almost four years removed from the advent of the apartment market recovery, demand for apartment units remains robust. The sector absorbed 40,392 units in the third quarter, well outpacing absorption from one year ago during 3Q2012 and up from the 33,634 units that were absorbed during the second quarter of 2013. Year to date, the sector has absorbed more units in 2013 than were absorbed through this point in 2012, but is well below the pace of net absorption during the early stages of the recovery in 2010 and 2011. Conversely, construction activity continues to increase. Completions during the third quarter were 34,834 units, an increase relative to last quarter's 28,891 units and the 21,237 units that were delivered during the third quarter of 2012. This is the highest level of quarterly completions since the fourth quarter of 2009. As we mentioned last quarter, it appears as if we are on the precipice of the relatively large surge in new supply that the market has been anticipating (though not seeing) for the last few years. ... Nonetheless, despite the increase in construction activity, robust demand continues to outpace new completions, intimating that most new units are being rapidly absorbed.
Asking and effective rents both by 0.9% and 1.0%, respectively, during the third quarter. ... Accelerating supply growth is not yet much of a factor in restraining rent growth, but that could change as construction activity surges over the next year. Nevertheless, even with tepid rent growth during the recovery period, national asking and effective rents once again reached all‐time high levels, at least on a nominal basis.
Despite supply growth accelerating, we do not expect there to be much change in the national vacancy rate during the fourth quarter due to continued strong demand. However, we anticipate that vacancy will slowly drift upward beginning in 2014, eventually reaching 4.9% by the end of 2017. This primarily should be a function of increased construction activity, not a fall off in demand, which should remain fairly robust.
This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.
New supply is finally coming on the market and the decline in the vacancy rate has slowed.
Apartment vacancy data courtesy of Reis.