by Bill McBride on 4/05/2016 12:41:00 PM
Tuesday, April 05, 2016
Reis reported that the apartment vacancy rate increased in Q1 2016 to 4.5%, up from 4.4% in Q4, and up from 4.3% in Q1 2015. The vacancy rate peaked at 8.0% at the end of 2009, and bottomed at 4.2% in 2014 and early 2015.
A few comments from Reis Senior Economist and Director of Research Ryan Severino:
If there were any doubts about rising vacancy in the apartment market they should now be put to rest. The national vacancy rate increased once again during the first quarter, marking three consecutive quarters of national vacancy rate increases. This is the first time this has occurred since the fourth quarter of 2009 when the apartment market was still struggling due to the fallout from the Great Recession. This is the beginning of an upward trend in vacancy that should persist for at least the next five years. New construction continues to exceed net absorption by a wider margin over time which will cause vacancy to increase in the majority (if not all) of the coming quarters. While the apartment market should still remain tight, there is clearly not a bottomless pool of demand that absorbs all of the units that are being delivered to the market.Click on graph for larger image.
Vacancy once again increased by 10 basis points to 4.5% during the first quarter with construction exceeding net absorption. Demand and supply are now clearly out of balance, a dynamic that should persist for the foreseeable future. If anything, there will be greater upward pressure exerted on the national vacancy rate because construction is likely to exceed demand by an increasingly wider amount over time. During the first quarter construction exceed demand by 10,931 units. Although this difference is narrower than the previous quarter, it remains significant. With construction set to increase faster than net absorption this difference should continue to widen in the coming quarters.
Asking and effective rents grew by 0.4% and 0.5% respectively during the first quarter. This is a noticeable decline relative to strength in rental growth that occurred during the last few quarters. Although seasonality plays some role in this, the rising vacancy rate due to increasing levels of new construction is likely amplifying those seasonal impacts. Nonetheless, rent growth should bounce back during the warmer middle quarters of this year when demand for apartments is typically stronger. However it is noteworthy that these were the weakest quarterly rent growth figures since the fourth quarter of 2011 when the market was not as tight with the national vacancy rate roughly 80 basis points above where it was during the first quarter of 2016.
Over the last 12 months, asking and effective rents both grew by 4.5%. This is roughly in line with what occurred during calendar year 2015 and is still the strongest over a 12-month period since 2007 before the recession. Even with rent growth likely to rebound in the coming quarters, the relatively weak first-quarter reading could cause rent growth during 2016 to be below that of 2015.
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 had been mostly moving sideways for the last few years. Now that completions are catching up with starts, the vacancy rate has started to increase.
Apartment vacancy data courtesy of Reis.