Resilience, Despite Minimal Improvement in Occupancy
Demand for apartments remains strong four years after the recovery began, even as construction activity has gradually been increasing. Not even the seasonal weakness normally observed during the fourth quarters of calendar years had much if any impact on the market dynamics.
Vacancy declined by 10 basis points during fourth quarter to 4.1%, in line with last quarter’s 10 basis point decrease. Over the last year the national vacancy rate fell by 50 basis points. The national vacancy rate now stands 390 basis points below the cyclical peak of 8.0%, recorded right after the recession ended in late 2009.
Shrugging off the seasonal weakness that is typically observed during the fourth quarter of calendar years, demand for apartments remained resilient. In 2013’s fourth quarter, the sector absorbed 50,627 units, the largest figure since the fourth quarter of 2010. For 2013, the sector absorbed almost 165,000 units, ahead of 2012 but below the incredibly robust demand of 2010 and 2011.
Supply growth rose substantially in the fourth quarter, with 41,651 units coming online. This is the highest quarterly total in ten years (41,995 units were delivered in the fourth quarter of 2003).
This spike was not unforeseen. As Reis has been warning for the last few quarters, inventory growth is clearly on an up- swing. Roughly 127,000 units were delivered during 2013. Though this represents the highest annual total since 2009, deliveries of new units were consistent with the long-term historical average. Four years after the advent of a recovery in the apartment market, newly completed units continue to be absorbed.
Rent Growth Appears to be Tapering Off
Asking and effective rent growth for the quarter, and for 2013 as a whole, paint a less rosy picture for the sector’s near term prospects. Asking and effective rent growth both grew by 0.8% during the fourth quarter. This is a minor decrease from the third quarter but still up from the lull in rent growth that the market experienced in the first half of 2013, when asking and effective rents only grew by approximately 0.6% per quarter.
Nevertheless, rent growth for 2013 came in below rent growth in 2012. Effective rents, for example, grew by 3.9% in 2012 but a full 70 basis points lower in 2013, at 3.2%. Given a vacancy rate that is over 100 basis points below the 20 year average, rent growth this weak is unprecedented. In prior historical periods when vacancies dipped below 5%, rent growth was at least 100 basis points above current growth rates on an annual basis.
Although the labor market continues to convalesce, household incomes remain stagnant, and landlords may have pushed rent increases over the last three to four years to the limit of what tenants are willing to pay. On a nominal basis, rents are at historically high levels, which is also constraining tenants' ability to pay higher rents in many markets.
New Haven remained the tightest market in the country with a 2.2% vacancy rate. New York, formerly the tightest market in the country, endured some softness for the second consecutive quarter, with vacancies rising to 2.7%. New York now resides in fourth place by this metric.
Twelve markets have a vacancy rate below 3.0% while the tightest, most expensive markets continue to reside on the coasts, benefiting from relatively constrained supply growth and expensive for-sale housing markets. 51 out of 82 primary markets had vacancies declining during the quarter; effective rent growth was positive in 79 out of 82 markets.
Overall, the results for 2013 highlight the ongoing pervasive nature of the apartment market recovery. There are a few notable exceptions. For example, two of the three markets with effective rent declines, Suburban Maryland and Suburban Virginia, are contending with the fallout from political brinkmanship and federal spending cuts while supply is ramping up to historically high levels. However, consider the perspective of how markets performed over the entire year.
None of Reis’s primary 82 markets experienced a decline in asking or effective rent growth; only 12 had rising vacancy rates. Of those 12, only one, Little Rock, had a vacancy rate increase greater than 1.0%. Eleven markets had asking rent growth greater than 4% over the last year. While national rent growth remains modest given low vacancy levels, there are a number of markets where rents continue to boom, such as Seattle, San Francisco, San Jose, and Oakland-East Bay.