U.S. Apartment Market Strengthening Continues in 2Q, But Still Not Immune to Marco Economy

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According to a new report from Reis Inc, second-quarter data shows that although the recovery in the apartment rental sector continued, the pace of recovery slowed relative to the first quarter. This is significant because the apartment market typically strengthens due to seasonal effects during the second quarter as the weather in much of the country improves and the school year ends, both of which facilitate moving.

Therefore, the apartment market recovery was not immune to the changes that occurred in the macro-economy. Real GDP growth slowed down during the first quarter after accelerating for two consecutive quarters and labor market data from the Bureau of Labor Statistics has shown a slowdown in hiring in May after a brief period of acceleration earlier this year.

Report Key Highlights

• 2Q 2011 Net Absorption (or Change in Occupied Stock, quarterly change versus 1Q 2011): +32,697 units

• 2Q 2011 Vacancy Rate Change (quarterly change versus 1Q 2011): A 20 bps decline, from 6.2% in the first quarter of 2011 to 6.0%

• 2Q 2011 Asking Rent Change: +0.5%

• One-Year Asking Rent Change (2010Q2 to 2011Q2): +2.0%

• 2Q 2011 Effective Rent Change: +0.6%

• One-Year Effective Rent Change (2010Q2 to 2011Q2): +2.4%

It appears as if these developments caused renters and potential renters to act a bit cautiously regarding their leasing and apartment needs during the second quarter. National vacancies fell by 20 basis points, from 6.2% to 6.0%, as the sector posted positive net absorption of roughly 33,000 units.  This is a decrease from the first quarter of 2011 when national vacancies fell by 40 basis points and net absorption totaled roughly 45,000 units.

Reis Senior Economist Ryan Severino said, "There continues to be a dearth in new completions.  There were relatively few projects with start dates in 2009 and only approximately 8,700 units opened their doors in the second quarter of 2011.  This is the second-lowest quarterly figure on record since Reis began publishing quarterly data in 1999.  The lack of new supply arriving on the market implies that existing properties continue to drive the net absorption of apartment units.

"We remain cautiously optimistic about the recovery in the economy and the apartment market. Many of the factors that caused the economy to slow during the first half of this year, such as a dramatic and unanticipated increase in energy prices, a snow-filled winter for a large portion of the country, and the disruption caused by the twin disasters in Japan, are isolated incidents that are likely to have only a temporary impact. Moreover, we continue to observe a convergence of positive factors for apartment rentals.

"First, as the absolute number of jobs continues to rise, demand for housing is increasing, particularly in the 20 to 34 year segment of the labor market.  However, with the for-sale-housing market still struggling, few of these newly hired young workers have the appetite to commit to buying a home. Additionally, many will want to wait until they have had some tenure with their current employer or have saved enough money before providing the requisite down payment for a house.  Finally, with a shortage in new supply for 2011, we expect vacancies to continue to decline throughout the year as households favor the rental market.  Although the improvement in the apartment market will likely spur new construction, any boost from these new units will not materialize till late 2012.   Note, however, that data from various sources already indicates a surge in applications for the financing of construction and development of new multifamily buildings."

Increases in asking and effective rents of 0.5% and 0.6%, respectively, represent a slight acceleration from last quarter's increases in asking and effective rents of 0.4% and 0.5%, respectively. Despite this quarter's slowdown, the ongoing recovery and tightening vacancies continue to generate greater pricing power on the part of landlords, demonstrated by the continued increases in asking rents. Furthermore, effective rent increases continue to outpace asking rent increases, indicating that concession packages continue to erode.

Because the slowdown in the economy is likely to be temporary, barring some unexpected shock from the global economy, we expect the recovery to continue throughout 2011. Vacancies should continue to decline while rents rise at an even faster pace than we observed in the first half the year.

MSA Level Conditions

Vacancies increased very slightly during the second quarter for New York City apartment properties. This increase, coupled with New Haven's decline in vacancy, caused New York City to relinquish its position as the tightest market in the country. New Haven once again occupies that position, buoyed by its student population.  Nonetheless, effective rent growth in New York City surged by 1.0%, likely indicating that the slight decline in vacancy had little impact on such a tight market.  The majority of markets (80 out of our primary 82 markets) posted increases in effective rents this quarter, with only one market posting a decline.

Severino stated, "Jacksonville is the only market that posted a decline this quarter, but it is coming off of a relatively strong first quarter.  As a hopeful sign, Las Vegas, which had not posted any rent increases since the third quarter of 2008, finally posted an increase this quarter."

 

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