by Bill McBride on 10/02/2015 10:01:00 AM
Friday, October 02, 2015
Reis reported that the apartment vacancy rate increased in Q3 2015 to 4.3%, up from 4.2% in Q2, and unchanged from 4.3% in Q3 2014. The vacancy rate peaked at 8.0% at the end of 2009.
A few comments from Reis Senior Economist and Director of Research Ryan Severino:
It appears as if the market has finally reached its inflection point during the third quarter. Although the national vacancy increase of 10 basis points was slight, it was actually a slight acceleration of a trend that began during the second quarter of 2014. That’s when vacancy technically started rising. While not a steady upward trend (vacancy declined slightly earlier this year), vacancy continues to generally inch higher as construction outpaces net absorption. Importantly, this rise in vacancy has occurred without the deluge of new supply that is in the pipeline but has not yet hit the market. When that occurs, likely in the next few quarters, vacancy increases are sure to accelerate because the market will not be able to digest that much new product.Click on graph for larger image.
Vacancy increased by 10 basis points to 4.3% during the quarter with construction slightly outpacing net absorption once again. Although vacancy has appeared to skip off of the bottom, vacancy has been largely unchanged over the last two years as supply and demand have been roughly in balance. However, slowly but surely construction is overtaking net absorption by a wider and wider margin and is nudging the national vacancy rate slightly higher. Although vacancy is unchanged over the last year, this is largely due to a weather‐induced pullback in construction during the first quarter of 2015. Without that, vacancy would likely be even higher now. Given the robust pipeline, further vacancy rate increases should be expected.
Asking and effective rents both grew by 1.3% during the third quarter. This was roughly in line with last quarter’s performance.
Even without the tsunami of new supply hitting the market, vacancy is on the way up. This does not portend goods things for the next couple of years as new completions increase and flood the market. ... That said, vacancy expansion will not be dramatic – there is far too much demand to prevent that from happening – so vacancy will marginally drift higher. Still‐low vacancy rates, coupled with new properties coming online with above‐average rents, should keep asking and effective rent growth around 4% for 2015 which would be the best calendar‐year performance since 2007.
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.
The vacancy rate has been mostly moving sideways for the last few years. As completions catch-up with starts, the vacancy rate will probably start increasing.
Apartment vacancy data courtesy of Reis.