Rents Up, Vacancies Down as Rental Market Continues to Rebound
Elliot F. Eisenberg, Ph.D.
With the national vacancy rate at a four-year low and rents for new and existing units approaching an all-time high, the rental apartment market appears to be staging a rebound. In fact, almost all of the variables that measure multifamily rental demand indicate a steadily improving situation.
The vacancy rate for buildings with five or more units stood at 9.5% for the three months ending December 2005, down from 10.8% during the third quarter of 2005, and lower than at any time since early in 2001. The vacancy rate for all rental properties (of which nearly a third are single-family units) stood at 9.6% in the fourth quarter of 2005, down slightly from 9.9% in the previous quarter, and down from 10% during the last quarter of 2004 (Figure 1).
Asking Rents Are Way Up
Median asking rents were $972 for rental units completed during the fourth quarter of 2004. Although that is down from the record asking price of $1,025 during the second quarter of 2004, it still is the third-highest level ever recorded, and it suggests general improvement in this market. Regionally, the Northeast and West continue to have the highest median asking rents, at more than $1,050 in each case. They are followed by the South, with a median asking rent of $910, and the Midwest with $854. Although rents are clearly highest on both coasts, median asking rents in the Midwest are at their highest levels ever, and the median asking rent in the South is within $38 of its highest monthly reading.
Perhaps not surprisingly, asking rents for existing apartments also have been generally improving, and are also near all-time highs (Figure 4).
For all existing units, the median asking rent was $593 during the fourth quarter of 2005, which is $21 lower than in the third quarter, $15 dollars lower than in the first quarter, and just $27 dollars less than a year ago. During the fourth quarter, the Northeast had the highest median asking rent at $727, followed closely by the West at $725. In the South it was $551, while in the Midwest it was $513.
Because asking rent data on new apartments are volatile from quarter to quarter and can change directions quickly, we have constructed a four-quarter moving average, and calculated year-over-year changes based on those moving averages. The data show that year-over-year growth in rents has increased steadily since late 2003. From a fourth-quarter 2003 low of 1.6%, the rate of increase in rents has risen every quarter, and stood at 5% by the fourth quarter of last year. Some of the increase may be attributed to changes in the characteristics of the multifamily rental units being produced. If they’re bigger, they’ll cost more. New units completed in 2004 were slightly larger than their 2003 counterparts. Median square footage rose from 1,092 square feet in 2003 to 1,105 in 2004, breaking the previous record of 1,104 square feet set in 2001. However, the share of new units completed in 2004 with 2 or more bedrooms fell by two percentage points to 63%, and the share with two or more bathrooms also declined — albeit slightly — from 50% to 49%.
Absorption rates for new, unfurnished rental apartments1 are the exception to the boatload of good news on the demand front. Those rates declined by 10 percentage points to 58% for units completed in the fourth quarter of 2004. This is an substantial deterioration from the 63% absorption rate recorded one year earlier, and is the lowest rate recorded since the first quarter of 2003 (Figure 2).
Regionally, the highest absorption rate was in the Northeast, at 94%, followed by an absorption rate of 59% in the West, 53% in the South, and 47% in the Midwest. Importantly, these rates are all lower than they were in the previous quarter, with the lone exception being the Northeast, where absorption rates increased by 17 percentage points.
While it is certain that some of the tightness in the rental market can be attributed to the number of units being converted to condos — and the lack of new apartments being built — there is also evidence that real demand is up. The formation of new households is a key part of the overall demand for multifamily housing, and household formation has risen significantly since the middle of 2004 (Figure 3).
There were approximately 105.3 million households in the U.S. in the fourth quarter of 2002, and just 105.9 million one year later, an increase of just 600,000 households, or slightly more than half of one percent. However, by the fourth quarter of 2004, the number had risen to 107.5 million, up 1.6 million (or 1.5%) from a year earlier. And for the most recently completed quarter, the number of households stood at 108.9 million, an increase of 1.4 million, or 1.3%. Still more significant —and not in a positive way — is that year-over-year household growth for the four quarters of 2005 was 1.9 million, 1.8 million, 1.5 million, and 1.4 respectively. This trend suggests that the rate of household formation may be slowing as the backlog of people who delayed forming households — due to the weak economy earlier in the decade — has now been exhausted.
This generally robust growth in households helps explain the first sustained increase in renter households since the one ending in the first quarter of 1995 — more than 10 years ago. At that time, the number of such households was about 35.5 million, and it now stands at 33.7 million, down slightly from 33.9 in the second quarter of this year. That was its highest reading since the first quarter of 2003, up from a low of 33.2 million during the first quarter of 2004. Newly-formed households tend to be renters rather than owners.
The Condo Market
In the fourth quarter of 2004, absorption rates for new condominiums and cooperatives2 rebounded strongly and were once again higher than for rental units. This is a pattern of relationship that has been consistent since 1999, with the exception of the third quarter of 2004. Nationally, the condominium absorption rate was 77% in the fourth quarter of 2004, up from a surprisingly low 66% in the third quarter of 2004. The highest absorption rate reported was 86% in the West, followed closely by the South at 77%. The Northeast was next at 75%, and the Midwest reported an absorption rate of just 63% during the fourth quarter of 2004.
Condominium production is up dramatically over the past several years. There were 71,000 multifamily condos/coops started in 2001 and 2002, 87,000 in 2003, and 120,000 in 20043. However, the 50,000 condos begun in the third quarter of 2005 is a whopping 35% more units than the 37,000 started in the third quarter of 2004. Moreover, the 116,000 condominiums started through just the first three quarters of 2005 is only 4,000 fewer than were started in all of 2004, which by historical standards was an excellent year.
Sales of existing condominiums and cooperatives, meanwhile, have been relatively strong, but have cooled somewhat during the latter part of 2005. During the full 2005 year, 896,000 existing condos/coops were sold — a 9% improvement over 2004, which was itself up about 12% from the previous year. Sales of existing condos rose by between 4% and 12% in 2005 across the four Census regions. The largest gain (12%) was recorded in the Northeast, which accounted for 37% of all existing condo sales last year.
In December of 2005, existing condos sold at a seasonally adjusted annual rate of 877,000 — the sixth highest monthly rate of all time — but a 3% decline from September 2005 and a 9% decline from June 2005. Further evidence of strong demand for condos is their price appreciation. Median condo resale prices spurted by 16% and 17% in 2003 and 2004, respectively, to levels of $165,400 and $193,600. Prices have continued to climb during 2005, and in October 2005 condo prices reached an all-time high of $230,300, a gain of nearly 19% over 2004.
1 Defined as how what percentage of privately financed, nonsubsidized, unfurnished units in buildings with five or more units are rented within 90 days of completion.
2 Defined as what percentage of privately financed, nonsubsidized, unfurnished units in buildings with five or more units are sold within 90 of completion.
3 All condominium price and quantity information come from National Association of Realtors monthly surveys.
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