Q3 Apartment Sector Trends:
Economic and demographic trends boosted demand for multifamily properties over the last couple of years, but recent trends suggest a slowdown in the rapid improvement in fundamentals. Vacancies fell by 30 basis points in the first quarter, 20 basis points in the second quarter, and recently fell by only 10 basis points in the third quarter. This is the slowest rate of improvement since the recovery began in early 2010. Net absorption, or the net change in occupied stock, slowed accordingly. Inventory growth continued at about the same pace, and although demand for apartments still clearly outstrips supply growth, there is cause for concern in the near-term that demand is abating for multifamily.
Two Fundamental Risks in the Near Future:
- Demand for apartment will not be as robust. Home prices have shown a clear upward trend in recent months, and as home prices rise, households may feel a greater impetus to consider buying homes while mortgage rates remain low.
- A big wave of new construction is expected to come online starting in 2013.
As always, real estate remains a local game: some metros and submarkets will see greater building and a subsequent dampening of demand that will hurt the prospects of rentals. Others will take increased inventory growth in stride. Certain metros like Seattle, Washington, DC and Suburban Maryland appear to be at risk, given that their occupancies have only just recovered to 2006 levels. On the other hand, although there are a lot of new projects coming online in Austin, it can be argued that demand for apartments will remain strong, given Austin’s large share of workers employed in the tech and energy sectors.