The national vacancy rate for multifamily properties rose by 10 basis points in the first quarter of 2016, to 4.5 percent. That is the third consecutive increase in vacancies since the middle of 2015.
This was largely prompted by what’s long been expected – strong growth in inventory, matching and exceeding demand that, for the record, has remained resilient. Over 42,000 units came online in Reis’s top 82 markets, the highest first quarter figure for new completions since Reis began tracking quarterly data in 1999. The market was robust enough to absorb about 30,000 of those units, but not enough to prevent vacancies from rising. With that said, we shouldn’t forget that first quarter fundamentals tend to be weighed down by seasonal weakness, with the sector more than making up during the more active second and third quarters. If anything, this quarter’s results can be interpreted as demand for multifamily units holding its ground in the face of seasonal weakness and high supply growth.
Supply and Demand Trends
Asking and effective rents increased by 0.4 and 0.5 percent, respectively; not just a step down based on seasonal weakness – these are the weakest first quarter increase since 2011. This suggests that despite the influx of new buildings presumably trying to charge premiums for novelty and new amenities, landlords were unable to charge significantly higher rents versus submarket averages.
It will be critical to see how fundamentals perform when the straw man of “seasonal weakness” is removed in the upcoming second and third quarters of the year, especially since we are not expecting a ramp down in inventory growt anytime soon. In fact, we expect 2016 supply growth to exceed 2015’s figure by a good 25 percent, if not more. Developers are still poised to bring a lot of product to market, and although the chart here shows a bit of a climbdown in 2017 and later, our research group that tracks shadow inventory suggests that there are at least as many projects in the pipeline, waiting to break ground, over the next two to three years – as there are in 2016. A lot of these projects are listed in our New Construction report, even if they don’t make it into our detailed formal forecasts since they haven’t exactly been greenlit yet, nor have they broken ground.
Still, because of said dynamics, we expect vacancies to creep up to the mid-5s by the end of our five year forecast period, which really means that the sky isn’t falling on multifamily, nor should it be interpreted as the sector losing its luster. If our outlook is for national vacancies to converge to the 20-year mean slowly, over the course of the next five years, then that should be cause for cautious optimism from current multifamily owners and operators – concern only for the most wildly optimistic of underwriting assumptions that require declining exit cap rates and double digit NOI growth for the transaction to work.