Apartment Vacancies–and Rents–Grow

The national apartment vacancy rate increased for the third consecutive quarter, reported Reis, New York.

“If there were any doubts about rising vacancy in the apartment market they should now be put to rest,” said Reis Senior Economist and Director of Research Ryan Severino. “This is the first time this has occurred since the fourth quarter of 2009 when the apartment market was still struggling due to the fallout from the Great Recession.”

Severino predicted the upward vacancy trend will likely persist for at least the next five years. “New construction continues to exceed net absorption by a wider margin over time, which will cause vacancy to increase in the majority if not all of the coming quarters,” he said. “While the apartment market should still remain tight, there is clearly not a bottomless pool of demand that absorbs all of the units that are being delivered to the market.”

Apartment vacancies increased 10 basis points to a still-healthy 4.5 percent during the first quarter, Reis reported.

Severino said construction exceed demand by 10,931 units during the first quarter. “Although this difference is narrower than the previous quarter, it remains significant,” he said. “With construction set to increase faster than net absorption this difference should continue to widen in the coming quarters.”

Despite increasing vacancy rates, asking and effective apartment rents grew by 0.4 percent and 0.5 percent respectively during the first quarter, Reis reported. Though down compared to the past few quarters, Severino said rent growth should bounce back during the warmer middle quarters of the year when apartment demand typically strengthens. “However,” he noted, “it is noteworthy that these were the weakest quarterly rent growth figures since the fourth quarter of 2011 when the market was not as tight.”

Severino said the past three quarters clearly demonstrate a change in the apartment market. “After almost six years of declining or flat vacancy, the tide is turning against the market,” he said. “Both sides of the marketplace–surging supply and moderating demand–are going to create an environment that is going to be more challenging over the balance of 2016 and the next five years.”

Severino expects vacancy will continue to rise for the balance of 2016 and rent growth will likely slow a bit relative to 2015. “The party in the apartment market is not over, but all of the punch is gone and the popular people are thinking about making their exit,” he said.