Quarterly Update: Trends, Rental Statistics, and a Look at Condos
by Dean Crist
Multifamily production is finally beginning to cool across the country, except in one region—the West—which saw a 16% increase in apartment starts in the first six months of this year. The Northeast posted a 6% increase in starts, but saw a year-over-year gain of only 1,000 units. Meanwhile, the Midwest and the South both showed declines in the number of starts, 13% and 20% respectively.

Three states— California, Texas, and Florida—accounted for the majority of multifamily production. In fact, 38% of all multifamily permits issued through June 2003 (a total of 74,380 units) were in these three states. That’s up from the 33% share of multifamily permits these states had for the same period a year ago (and the same share they captured for all of 2002). Add the next two largest states for multifamily permit issuances—New York and Georgia—and the share of total permits for year-to-date 2003 for these 5 states comprises nearly one-half the nation’s total (48%). The percentage gain for the top three states in 2003 over 2002 is 19%. California had a 60% gain and Texas 20%, though Florida’s issuances fell 2%. Subtract these states from the U.S. total, and multifamily permits were down nearly 5% from mid-year 2002.

Demand Fundamentals Still Weak    

Most of the variables that measure multifamily rental demand do not show signs of a market improving. The vacancy rate for all rental properties (of which nearly a third are single-family units) was 9.6% in the second quarter of 2003, up from 9.4% in the previous quarter and 8.5% one year earlier (Figure 1).

                Source: U.S. Census Bureau, Housing Vacancies and Homeownership

Regionally, the highest vacancy rate was located in the South, at 12.3% in the second quarter, and that rate was up from 10.6% one year earlier. The West reported a vacancy rate of 7.2% in the second quarter of this year, compared to 6.7% a year ago.  The Northeast reported vacancies at 6.8% for the period April-June 2003, 1.2 percentage points above the second quarter of 2002. And the Midwest weighed in with a 10.6% rate, which was about one percentage point above a year earlier. Perhaps most notable, apartment buildings with five or more units accounted for 43% of all vacancies in the second quarter of 2003, and the vacancy rate in these buildings were up from 10.8% to 11.3% in the  second quarter.   

Absorption Rates Up Slightly from Record Low

Absorption rates for new, unfurnished rental apartments had set a record low of 55% for units completed in the first quarter of 2002. That rate has since improved, moving up to 57% and 62% for completions in the second and third quarters, before falling back to 60% in the last quarter of 2002 (Figure 2). Although the latest absorption rate is an improvement over the first half of 2002, it nonetheless remains low in comparison to the period from 1993 to 2000, when absorption rates did not fall below 70 percent, and reached 80 percent on several occasions.

Absorption rates are for structures with five or more housing units that are privately financed, nonsubsidized, and unfurnished. Source: U.S. Census Bureau, Housing Reports Series H-130, Market Absorption of Apartments.

The relatively low absorption rate can’t be attributed to a flood of units coming on line. Indeed, there were 204,700 privately financed, unsubsidized and unfurnished rental apartments completed in 2002 – up a bit from 2001’s 192,900, but well below the 225-226,000 completed in 1999 and 2000 when absorption rates were in the 70 to 73% range.

Some of the trouble can be blamed on last year’s significant slowdown in new household formation—a key demand driver for apartments. The growth in the number of households in 2002 was the second lowest since 1997, with the weak job market playing a major role in depressing household growth in 2002.

Rents Also Down

For rental units completed in the fourth quarter of 2002, the median asking rent was $905. Because asking rent data are volatile from quarter to quarter and can change directions quickly, we use a four-quarter moving average and calculate year-over-year changes based on those moving averages. The data show that year-over-year growth in rents dropped markedly throughout 2002. From a second-quarter 2001 high of 11.1%, the increase in rents has fallen every quarter, reaching a 1.3% growth rate by the fourth quarter of last year.

Some of the slowdown may be attributed to changes in the characteristics of the units being produced. New units completed in 2002 were smaller than their 2001 counterparts, with median square footage falling from 1,104 square feet in 2001 to 1,069 in 2002. The share of new units completed in 2002 with two or more bedrooms also fell by one percentage point, to 69%. But the share with two or more bathrooms increased slightly—from 58% to 59%.    

Condo Market Continues to Show Strength

Absorption rates for new condominiums and cooperatives remain substantially higher than rates for rental apartments, hovering between a 2002 low of 68% in the fourth quarter to a high of 86% in the  second quarter. The higher absorption rates for condominiums make sense in that these for-sale units benefit from low mortgage rates the same way for-sale single family homes do. 

Condominium production, however, has not picked up much. There were 71,000 multifamily condos/coops started in 2002 -- the same as in 2001, and fewer than 2000’s total of 75,000. The 17,000 condos begun in the first quarter of this year were only slightly above the 15,000 started in the first quarter of last year.

Sales of existing condominiums and cooperatives, meanwhile, have been relatively strong. There were 820,000 existing condos/coops sold in all of 2002—a 10% improvement over 2001, which was itself up about 6% from the previous year. Sales of existing condos rose by between 9% and 11% in 2002 in each of the four Census regions.  The largest gain of 11% was recorded in the South, which accounted for 46% of all existing condo sales last year. 

In the first quarter of 2003, existing condos sold at a seasonally adjusted annual rate of 846,000, a 3% advance from both the previous quarter and the first quarter of 2002. Further evidence of strong demand for condos is their price appreciation. Median condo resale prices surged by 10% and 11% in 2001 and 2002, respectively, to levels of $123,200 and $137,200.  Prices continued to climb throughout all of last year and into early 2003, when median condo prices rose to $150,700 – a gain of nearly 13% from one year earlier.
[ return to top ]