National Market Trends

There was no clear trend in national apartment vacancy rates in the first quarter of 2007. The U.S. Census Bureau vacancy rate for all rental apartments (those with 5 or more units) increased to 10.7 percent, from 10.1 percent the previous quarter and from 9.7 percent a year ago. By contrast, the M/PF Yieldstar vacancy rate for investment-grade apartments remained at 4.8 percent. The vacancy rate increased this quarter in the Northeast and South, but fell in the Midwest and the West. The Northeast still has the nation’s lowest vacancy rate at 4.0 percent; the rate was 4.8 percent in the West, 5.5 percent in the Midwest, and 5.6 percent in the South.

Multifamily permits increased while multifamily starts and completions declined in the first quarter. Permits (5+ units in structure) increased to a seasonally adjusted annual rate (SAAR) of 364,700, 12.1 percent higher than the previous quarter but 16.6 percent lower than a year ago. Starts declined to a SAAR of 266,700, a drop of 7.5 percent from last quarter and of 22.3 percent from a year ago. This was the largest year-to-year drop since the first quarter of 1993. It was also the second-lowest quarterly figure in 10 years. And completions declined to a SAAR of 286,700 this quarter, a drop of 9.6 percent from last year and of 1.1 percent from a year ago. Interestingly, the pickup in permits in 2004-2006 never produced a corresponding pickup in starts and completions. 

While still negative, multifamily net absorptions of investment-grade apartments tracked by Reis rose in the first quarter to a level of -1,371, improving by 12,974 from the fourth quarter of 2006, when they were -14,345. It is an even greater improvement from the level of -28,118 a year ago. As a result, the four-quarter average shows absorptions at the highest level in a year and a half. Multifamily completions in the investment-grade market declined to 17,310, down 9,645 from the previous quarter but up 1,706 from a year ago, a further sign that new apartment supply is well in hand at this point in the cycle.

Like vacancy rates, apartment rents moved in different directions. Same store rents for apartments in the professionally managed portfolio tracked by M/PF Yieldstar rose 2.8 percent from a year ago, the smallest pickup in seven quarters. The deceleration in rent growth from the previous quarter was most notable in the Midwest. Even so, rents outpaced overall inflation slightly, so that “real” rents rose for the fifth straight quarter. In contrast, the CPI rent index, which covers all rental housing, not just apartments, increased in the fourth quarter by 4.6 percent from last year, its largest increase in five years.

Apartment price appreciation continued to increase. The market values of investment-grade apartments in the National Council of Real Estate Investment Fiduciaries’ (NCREIF) database rose in the first quarter by 1.7 percent from the previous quarter and by 8.4 percent from a year ago. Among “Class A” apartment transactions monitored by Global Real Analytics, the average price for properties sold in the fourth quarter of 2006 (latest data available) was $154.79 per square foot, up 12.4 percent from last year. Rent per square foot for these properties increased to $16.37, a gain of 6.6 percent from the previous year. And the average cap rate remained at 6.1 percent.

Condo Deliveries Still Strong
The frenzied condo activity of the first half of the decade gave way last year to a clear cyclical downturn. Sales of existing condos fell by more than 10 percent, while five years of double-digit price appreciation gave way to an actual decline in condo prices. Nationally, condo prices fell by just under 1 percent, although condo prices in the West actually fell by 6.7 percent. While the drop in demand brought a quick halt to the condo conversion boom, it takes longer to ratchet down new construction activity. Condo starts did not begin to rise until 2003. While the peak occurred in the third quarter of 2005, new condo starts for all of 2006 were actually higher than in 2005—at 152,000 starts—were the highest in more than 20 years. What’s more, the condo share of multifamily starts rose to a record 45 percent. That means there is still a lot of condo construction in the pipeline. Condo completions didn’t start to rise until 2005 and should continue to be strong for at least another year, putting additional pressure on the condo market—and perhaps on the apartment market as well.

Questions or comments on Market Trends should be directed to Mark Obrinsky, National Multi Housing Council’s Vice President of Research and Chief Economist, at mobrinsky@nmhc.org or 202/974-2329. Web sites of organizations providing data used in this issue are: www.yieldstar.realpage.com (M/PF Yieldstar); www.globalrealanalytics.com (Global Real Analytics); www.ncreif.org (NCREIF); www.reis.com (Reis); www.census.gov (U.S. Census Bureau); and www.bls.gov (U.S. Bureau of Labor Statistics).