Multifamily Vacancy Edges Up, Rent Growth Continues
The national multifamily vacancy rate continues its slow rise, ending the first quarter at 4.7 percent, 10 basis points higher than year-end 2017, reported Reis, New York.
“This is no surprise,” said Reis Chief Economist and Senior Vice President Victor Calanog. “While various indicators suggest continuing robust demand for rental apartments, vacancies have been rising since late 2016 as a veritable avalanche of new supply–a record high for some areas–works as a counterbalancing force.”
But rent growth remains positive, Calanog noted. Asking and effective rents both rose 0.8 percent year-over-year.
On a market-by-market basis, absorption remained positive in 72 of the 82 primary markets Reis tracked in the first quarter, up from 69 in first quarter 2017. Effective rents rose in 80 of 82 markets, up from 62 one year ago. “The only conclusion that most apartment investors should take from any five-year market trend is that the period from 2017 to 2021 will not be as strong as the recovery period from 2011 to 2016; unless we encounter an economic slowdown, demographics suggest that renter demand will continue to be strong even as supply growth abates,” Calanog said.
JLL, Chicago, reported first-quarter multifamily transaction activity increased more than 32 percent compared to a year ago. “This was driven in part by an uptick in activity in primary markets, particularly New York, which saw their share of volumes grow in the first quarter,” the Investment Quick Look report said. “As transaction activity increased, demand fundamentals remained unchanged through the new year and into the first quarter as new deliveries continued at elevated levels.”
Developers delivered more than 90,000 new units during the quarter, JLL said. This represents a 41 percent jump compared to average quarterly deliveries over the past decade. Future deliveries will likely exceed 90,000 units per quarter for the next three quarters then start to slow in 2019, the report said.
Mark Vitner, Senior Economist with Wells Fargo Securities, said his firm still believes there is some life left in the apartment boom due to renewed building in supply-constrained markets such Los Angeles and Denver “and increased activity in a whole host of smaller markets left out of the previous building boom.”
Calanog predicted some submarkets will be challenged going forward, “but short of a recession–which not even the Federal Reserve’s Comprehensive Capital Analysis and Review projections are expecting any time this year–apartment fundamentals will likely weather this storm with aplomb,” he said. “As early as next year, a pullback in new construction should serve the sector well. The oldest of the Millennial generation may be considering homeownership as they hit their mid to late 30s, but the bulk of Millennial renters are still in their mid-20s. This suggests that the multifamily sector is unlikely to experience a sudden drop in demand, at least in the near term.”
