Multifamily by the Numbers — a Quarterly Update
Elliot F. Eisenberg, Ph.D.
Here are the highlights: Vacancies stay low, absorption continues to rise, rents stay strong. Household formation, though, has begun a gradual slowdown. And while sales of existing condos are at a record pace, at near-record prices, condo production has begun to slow down as the market becomes more saturated with new product.

Demand Remains Strong

Most of the variables that measure multifamily rental demand are indicating a solid and healthy first quarter of 2006. The vacancy rate for buildings with five or more units stood at 10% for the three months, up slightly from 9.5% during the fourth quarter of 2005, but lower than at any other time since early in 2001. The vacancy rate for all rental properties (of which 30% are single-family units) stood at 9.5% in the first quarter of 2006, down slightly from 9.6% in the previous quarter and down from 10.1% during the first quarter of 2005 (Figure 1). 

Regionally, the highest vacancy rate was located in the Midwest, at 12.6% in the first quarter, up from 12.2% a year earlier. The West reported a vacancy rate of 6.7% in the first quarter of this year, down from 7.5% a year earlier. Vacancies in the Northeast came in at 7.3% for January-March 2006, just a tenth of a percentage point above the first quarter of 2005. And the South weighed in with a 10.9% rate, which was barely greater than one percentage point less than it was a year earlier.      

Figure 2 shows just how large differences in rental vacancy rates are across the 50 states. Houston and other areas around the Gulf may finally be able to get out from under a supply glut if hurricane evacuees settle permanently and get jobs, as is likely. Ironically—and tragically—the only state in the region where rental vacancy rates weren’t in double digits as of mid-2005 was Louisiana.

Absorption rates for new, unfurnished rental apartments¹ increased by two percentage points to 60% for units completed in the first quarter of 2005. This is an slight improvement from the 61% absorption rate recorded one year earlier, and is the second lowest rate recorded since the first quarter of 2003 (Figure 3).

Regionally, the highest absorption rate was in the Northeast, at 74%, followed by an absorption rate of 65% in the West, 59% in the South, and 54% in the Midwest. Importantly, these rates all are higher than they were in the previous quarter, with the lone exception being the Northeast, where absorption rates decreased by 20 percentage points. 

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 4).

There were approximately 105.4 million households in the U.S. in the first quarter of 2003, and just 105.9 million a year later, an increase of just 500,000 households, or slightly more than half of one percent. However, by the first quarter of 2005 the number had risen to 107.8 million, up 1.9 million (or 1.8%) from a year earlier, and for the most recently completed quarter, the number of households stood at 109.3 million, an increase of 1.5 million, or 1.4%. More significant is that year-over-year household growth ending in the in the last three quarters of 2005 and the first quarter of 2006 was 1.8 million, 1.5 million, 1.4 million and 1.5 million, respectively. This trend suggests that the rate of household formation may be gently slowing as the backlog of people who delayed forming households due to the weak economy earlier in the decade has now been exhausted.

This robust growth in households helps explain the first sustained increase in renter households since 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 34.4 million—up significantly from 33.3 million a year ago, and up from 33.7 million in the last quarter of 2005. The number of renter households now is at its highest reading since the fourth quarter of 2002—and up from a low of 33.1 million during the last two quarters of 2004. Newly formed households tend to be renters rather than owners.          

Asking rents near all-time highs

Median asking rents were $932 for rental units completed during the first quarter of 2005. Although that is down from the record asking price of $1,025 during the second quarter of 2004, it still is the sixth 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 over $1,050 in each case. They are followed by the South with a median asking rent of $905, and the Midwest with $763. Although rents are clearly highest on both coasts, median asking rents in the Midwest are near all-time highs, and the median asking rent in the South is within $43 of its highest quarterly reading.   

Perhaps not surprisingly, asking rents for existing apartments also have been generally improving, and also are near all-time highs (Figure 5).

For all existing units, the median asking rent was $600 during the first quarter of 2006, which is $7 higher than in the fourth quarter and just $8 dollars less than a year ago. During the first quarter, the West had the highest median asking rent at $758, followed closely by the Northeast at $746. In the South the median asking rent was $560, while in the Midwest it was $554.         

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 been solid since late 2003. From a year-over-year fourth quarter 2003 low of 1.6%, the rate of year-over-year increase in rents has consistently been above 3.0% ever since, and stood at 3.7% for the year ending March 2006. Some of the increase may be attributed to changes in the characteristics of the multifamily rental units being produced. 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%.    

Condo market begins to moderate

In the first quarter of 2005, absorption rates for new condominiums and cooperatives² rebounded strongly and were once again generally higher than for rental units. This is a relationship that has been consistent since 1999, with the exception of the third quarter of 2004. Nationally, the condominium absorption rate was 75% in the first quarter of 2005, down from a robust 77% in the fourth quarter of 2004. The highest absorption rate reported was 85% in the South, followed closely by the West at 81%. The Midwest was next at 66%, and the Northeast reported an absorption rate of just 28% during the first quarter of 2005. While 28% is very low, it is important to remember that quarterly absorption numbers are volatile, and that the completion of just one large project can dramatically alter the results. It will be interesting to see the results for the Northeast unfold over the next several quarters.      

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, 120,000 in 2004 and a stunning 149,000 in 2005³. Despite solid growth in condo starts in 2005, this market appears to be cooling. While a record 50,000 condos were begun in the third quarter of 2005, only 35,000 were started in the fourth quarter of 2005 which, while the fourth highest quarterly total ever recorded, suggests that condo starts are retreating from recent historic highs.            

Sales of existing condominiums and cooperatives, meanwhile, have been strong, but also have cooled slightly from the torrid pace exhibited during the second and third quarters of 2005.  For all of 2005, 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% percent 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 March of 2006, existing condos sold at a seasonally adjusted annual rate of 854,000, the 11th highest monthly reading of all-time, a three-and-a-half percent decline from December 2005 and just a two percent decline from March 2005. Further evidence of continued strong demand for condos is their price appreciation. Median condo resale prices spurted by 18%, 17%, and 14% in 2003, 2004, and 2005 respectively, to levels of $168,500, $197,100, and $223,900. Prices have continued to climb during 2006, and in March 2006 the median condo price was $225,500, less than 3% off the all-time monthly high of $231,800 set in June 2005. 
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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.   [ return to top ]