The national vacancy rate held steady in the fourth quarter at 4.2 percent, confounding pessimists who thought that steadily increasing supply growth heralded the end of good years for apartments. Over the course of the year, vacancies fell by only 10 basis points – a clear slowdown versus the 30 basis point decline in 2013, which was itself a disappointment versus the 70 basis point decline in 2012.
Relative to the second and third quarters, asking and effective rent growth also decelerated; still, both types of rents increased by 0.6 percent, and the annual asking rent growth for 2014 was actually the strongest year-over-year figure since 2007. All this seems to point to relative resilience in multifamily fundamentals.
There may be some headwinds over the near term. As recently as the third quarter, we expected about 180,000 units to open their doors for all of the year. Only about 160,000 actually materialized, indicating that a large number of projects slated for completion in the fourth quarter were probably delayed to this year.
Supply and Demand Trends
What this means is that we are expecting a large number of new apartments to open their doors this year – anywhere from 225,000 to 250,000 units in our top 82 markets. That will exert upward pressure on national vacancies, but not in an overly concerning way. Our forecasts for the next five years through 2019 shows modest growth in rents, with steadily declining occupancies – but we end 2019 with national vacancies still below 6 percent. This puts it at only slightly above the 20-year long term average of 5.4 percent. Unless supply growth continues to rabidly exceed demand, we do not expect multifamily fundamentals to weaken significantly – many lenders are already trying to hit the brakes on new construction lending, or are at least kicking the tires more carefully to ensure that they aren’t relaxing their underwriting standards in response to more competition.
But by how much will demand truly hold up? Will Millennials really continue to be “renters by choice,” as others trumpet?
Trends in Homeownership Across Age Groups
I remain skeptical about whether Millennials, defined as that age cohort born between 1980 and 1995, will remain wedded to apartment rentals in downtown areas. As people age, the siren song of homeownership (and greater space, in neighborhoods with better schools) tends to grow stronger. Though there have been some peaks and dips in the last decade or so because of the housing boom and bust, I’m not sure that trend will persist unless the current trajectory of home price recovery and mortgage lending takes an unexpected turn for the worse.
The next few years will offer some interesting insight into whether the oldest Millennials, who will hit their mid-30s this year, will continue to hold on to smaller rental apartments in downtown locations, or will, in a systematic fashion, begin craving for more space in suburban areas as they have children. The seismic shift might not even happen with baby number one, but during the kindergarten years of baby number one – when concern for school quality begins to really kick in.