by Bill McBride on 1/06/2015 08:28:00 AM
Tuesday, January 06, 2015
Reis reported that the apartment vacancy rate was unchanged in Q4 at 4.2%, the same as in Q3. In Q4 2013 (a year ago), the vacancy rate was also at 4.2%, and the rate peaked at 8.0% at the end of 2009.
Some comments from Reis Senior Economist Ryan Severino:
The national vacancy rate was unchanged at 4.2% during the fourth quarter. This follows last quarter's slight 10 basispoint increase in vacancy which was the first increase since the fourth quarter of 2009. Although vacancy did not continue to increase this quarter, the unchanged vacancy rate shows that the days of excess demand are likely over. Additionally, the surge in construction that we have observed in recent periods eased a bit this quarter after increasing during each of the last two quarters. Some of this is due to seasonality ‐ the market tends to slow during the fourth and first quarters of calendar years. Meanwhile, demand had a surprising rebound during the fourth quarter to 45,027 units, the highest quarterly figure since the fourth quarter of 2013. This is an important point ‐ even as construction increases in 2015 and beyond, demand will remain robust due to the large number of young renters in the US. However, as we mentioned last quarter, this is the beginning of an up cycle in vacancy and demand will struggle to keep pace with the significant amounts of new construction that should come online over the next few years.Click on graph for larger image.
While the market is still very tight at 4.2%, that level of vacancy is not going to be sustainable over the next few years. Supply will outpace demand and vacancy will slowly drift upward. While we still anticipate that the market will remain relatively tight, rising vacancy is likely to put downward pressure on NOI growth over the next few years, even as rents continue to grow.
Asking and effective rents both grew by 0.6% during the fourth quarter. This is a bit of a slowdown from the pace observed during the second and third quarters, but seasonality surely contributed to this. This was the weakest quarterly rate of rent growth since the first quarter of 2013. None the less, the trend in rents over time is up. 2014 annual rent growth for asking and effective rents was 3.5% and 3.6%, respectively. Not only is this the best performance in the apartment market since 2007, but apartment easily remains the best performing property type in this respect. Yet again, rents reached record‐high nominal levels during the fourth quarter. Although an improving labor market with more jobs and faster wage growth should provide landlords with more leverage to increase rents, over time this will be stymied by the sheer number of new units that are going to come online, increasing competition in the market. Although rent growth should remain positive for the next five years, the rate of growth is anticipated to slow, even as new units come online with rents that are higher than the market average.
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.
Apartment vacancy data courtesy of Reis.