Multifamily Indicators — First Quarter 2003 Update
Rose Gutierrez
Weak and getting weaker – that’s the multifamily economic news from the first quarter of 2003. Vacancy rates, absorption rates, and starts rates were all headed toward trouble, with no turnaround on the horizon.

Multifamily demand fundamentals continued to deteriorate in the first quarter of 2003, although the starts rate for structures with 5 or more units remains strong, and multifamily building permits actually have been increasing. The 3-month absorption rate for rental apartments completed in the first three quarters of 2002, for example, was the lowest since the inception of the series in 1972.  Vacancies in 5+ unit structures rose significantly between 2001 and 2002, and again in the first quarter of 2003 (compared to a year earlier). In addition, the homeownership rate remains above 68.0%, fueled by low mortgage rates.  A steady pace of net new household formations and an ongoing (though declining) rise in the number of renters have failed to turn the tide for multifamily absorption.

Regional Construction Patterns

Overall, the seasonally adjusted annual rate of multifamily starts in the first quarter of 2003 was down 3.9% from the first quarter of 2002.  A 32.1% drop in the construction of new units in 2-to-4 unit buildings was responsible for the entire decline, however, so the production of units in 5-or-more unit buildings was virtually unchanged.

Moreover, regional trends in multifamily construction exhibited significant differences. While the West saw multifamily starts rise strongly from 17,000 units to 21,000 units during this period, the Northeast saw a more modest increase of only 1,000 units, reaching a total of 8,000 starts. Those gains, however, were offset by declines in the Midwest and South regions.  In the Midwest, for example, only 10,000 multifamily units were started during the first quarter of 2003. That’s 4,000 fewer than a year earlier. In the South, multifamily starts declined by 5,000 units –- down to 33,000 units -– during the same period.

In sharp contrast to changes seen in multifamily housing starts, multifamily building permits showed a significant increase between the first quarters of 2002 and 2003, rising 6.2% from a seasonally adjusted annual rate of 388,000 authorizations to a rate of 412,000.  At the end of March 2003, there were 62,700 multifamily permits still unused -- significantly higher than the 51,300 classified as unused at the end of March 2002.
Multifamily building permits in the first quarter of 2003 followed a similar regional pattern (Figure 1). While the West and Northeast experienced increases in their issuance of multifamily permits, up 32.6% and 19.5%, respectively, the Midwest and South regions saw permits for multifamily units fall (6.3 percent and 2.8 percent, respectively) between the first quarter of 2002 and the first quarter of 2003.

Condominiums and co-ops represented 20.2% of all multifamily starts last year were – there were 70,000 started in 2002. This number is not significantly different from the 71,000 condos and co-ops started in 2001. That year, co-op and condo units represented 21.6% of multifamily starts. 

Multifamily Demand Continues to Weaken

Meanwhile, the weakening trend in multifamily demand fundamentals continues unabated.  In 2002, the vacancy rate for all rental units -- which includes single-family rentals -- rose to an all-time high of 9%.

That eclipses both the previous record of 8.7% registered in 1961 and  the 8.4% level in 2001. Much of the total increase came from multifamily rentals, as vacancies in structures with 5+ units rose from 9.6% to 10.5% during this period. More recent data show that the total rental vacancy rate continued to climb in the first quarter of 2003, rising to 9.4% from 9.1% a year earlier. As was the case in 2002, the latest increase in vacancies stems mainly from multifamily rentals: 2-to-4 unit structures saw vacancies rise from 8.3% to 9.2% between the first quarters of 2002 and 2003, while for 5+ unit structures the increase was from 10.7% to 10.8%.

Like construction activity, changes in vacancy rates have not been uniform across the country (Figure 2). While the South saw vacancies rise from 11.8% to 12.4% between the first quarters of 2002 and 2003, the West and Northeast experienced milder increases, rising from 7.0% to 7.3% and from 5.8 % to 6.0%, respectively. The Midwest region, on the other hand, saw its rental vacancy rate fall slightly during this period, going from 10.3% to 10.2%.

Another measure continuing to signal weakness in multifamily demand is apartment absorptions.  For units completed in the first three quarters of 2002, the average 3-month absorption rate was 60%, compared to 65% and 73% in the corresponding periods of 2001 and 2000, respectively.  Unlike rental apartments, condominiums finished in the first three quarters of 2002 saw their 3-month absorption rate rise to 76%, up slightly from the 73% average rate posted for the first three quarters of 2001.

Meanwhile, the strong gains seen in recent quarters in the number of renters and in the net addition of new households have now moderated.  More explicitly, the year-over-year pace of net household formations was 1.4 million for the year ending in December 2002. Even though that was greater than the 1.1 million posted for the year ending in December 2001, it was below the 1.6 – 1.8 million pace posted throughout most of 2002 (although the difference could be due to imprecision in the monthly estimates of the number of households rather than real swings in behavior).  In addition to the slower pace of net new household formations, increases in the number of renter households also have slowed down.  Although there were 152,000 more renters in the first quarter of 2003 than in the same period a year earlier, that increase was milder than the 163,000 gain recorded in the fourth quarter of 2002, and significantly smaller than the 729,000 and the 616,000 jumps posted in the third and second quarters of 2002, respectively.

As 40-year low mortgage interest rates continue to attract people to homeownership, the share of households who owned their homes in the first quarter of 2003 stood at 68.1%, ahead of the 67.9% posted a year earlier and not much different from the record 68.2% reached in the fourth quarter of 2002.

Characteristics of New Apartments Affect Rents

Given their considerable time lag, the latest data on the median asking rent for newly constructed apartments still show increases -- though at a slower pace.  Thus, for apartments completed in the first three quarters of 2002, the median asking rent reached an average of $918. That’s 2.9% above the $892 average posted in the first three quarters of 2001.  In the first three quarters of 2001, the median rent on newly completed apartments had grown 11.0% compared to a year earlier.   Consumer Price Index  data also shows rents for occupied units continuing to rise, but at a slower pace relative to overall inflation.

The slowdown in asking rent for units completed in 2002, aside from the weakening in demand, is due to the fact that new units finished last year were slightly smaller than in 2001.  The median floor space of 2002 multifamily completions was 1,069 square feet – that’s 35 square feet fewer than in 2001.  In addition, the average size of an apartment completed in 2002 was 1,165 square feet, compared to 1,171 square feet in 2001.  [ return to top ]