Most Apartment Fundamentals Show Strength. Condos? Not So Much.
Elliot Eisenberg, Ph.D.
The national multifamily market appears to be going through an orderly cooling process, based on available quarterly statistics. Those numbers show that condo activity is down somewhat—but down from record high levels in recent years. Indicators of rental demand, meanwhile, are beginning to send mixed signals, with the most recent quarterly vacancy rates for 5+ units edging up, and absorption rates edging down, at the same time as asking rents and the increase in the number of renter households remain strong, which may indicate a more positive climate for multifamily in the future.

Rental Demand Fundamentals     

The vacancy rate for buildings with 5 or more units stood at 10.4% for the three months ending June 2006, up slightly from 10% during the first quarter of 2006, and up from 9.5% during the fourth quarter of 2005. The vacancy rate for all rental properties (of which 30% are single-family units) stood at 9.6% in the second quarter of 2006, up slightly from 9.5% in the previous quarter and down from 9.8% during the second quarter of 2005. Over the longer term, vacancy rates have been trending downward. At 104%, the vacancy rate for 5+ unit buildings still is lower than it was in 2003, 2004, and most of 2005 (Figure 1). 

Looking at the most recent quarterly vacancy rates by region, we see that the highest vacancy rate was in the Midwest, at 12.6% in the first quarter—unchanged from one year earlier. The West reported a vacancy rate of 6.8% in the second quarter of this year, down from 7.5% one year earlier. Vacancies in the Northeast came in at 6.9% for the period April-June, eight-tenths of a percentage point above the second quarter of 2005, and the South weighed in with a 11.1% rate, which is down seven-tenths of a percentage point from what it was a year ago.      

National absorption rates for new, unfurnished rental apartments¹ decreased by one percentage point to 59% for units completed in the second quarter of 2005. This is also down slightly from the 62% absorption rate recorded a year earlier, and is the second-lowest rate recorded since the first quarter of 2003 (Figure 2). 

Regionally, the Northeast and West had the highest absorption rates, at 65%, while the South and Midwest both reported absorption rates of 55%. These rates were either the same or lower than they were compared to the previous quarter, or to the rates 12 months earlier.   

Table 1(in two sections below) presents absorption rates for all metro areas for which absorption data are available for both 2004 and 2005. A scan down both columns makes it clear that, in general, absorption rates are higher—and in some cases substantially higher—in 2005 than they were in 2004.

Possible reasons why metro area absorption rates are generally up while national and regional rates are slightly down include the sustained increases in house prices in many metro areas of the country, which collectively have tilted the balance of the market in favor of rental housing and caused a rise in the number of renter households. Also, the time periods for which absorption data are available are not the same for all the geographic regions, and this also may be a contributing factor.                          

Unfortunately, this type of valuable information may become more much more difficult to obtain if HUD’s proposal to end its funding of the Survey of Market Absorption of New Apartments (SOMA) is successful. In particular, the SOMA collects information on absorption rates for new rental units and new condominiums, as well as asking rents for new rental units and asking prices for new condominiums at various levels of geographic detail. It is the only source of the information shown in Table 1 that is available on a consistent basis across the country.

[NAHB has sent a letter to the appropriate people at HUD stressing the value of this survey to many of our members, and noting that we have been working with the agency on ways to improve the survey for almost a decade. If, however, this sort of information is valuable to you and you would like the government to continue collecting and publishing this survey, the most effective way to communicate your concern is to write directly to Ron Sepanik at HUD. His contact information is available at the link below.  http://www.census.gov/hhes/www/housing/soma/soma.html. ]
       
More New Households are Forming

The formation of new households is another key indicator of the overall demand for multifamily housing, and household formation has risen significantly since the middle of 2004 (Figure 3). This trend suggests that the rate of household formation may be on the upswing due to the continued strong performance of the U.S. economy. 

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 34.2 million—up slightly from 33.9 million a year ago, but down slightly from 34.4 million in the first quarter of 2006. The number of renter households is now at its second-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 are Rising

Median asking rents were $974 for rental units completed during the second quarter of 2005. Although that is down from the record asking price of $1,025 during the second quarter of 2004, it is the third-highest reading ever recorded and it is $42 higher than in the previous quarter. This strongly suggests general improvement in this market. Regionally, the Northeast continues to have the highest median asking rent, at more than $1,150. The West was close behind, with a median asking rent of $1,088. Those two high-priced regions are followed by the South, with a median asking rent of $885, and the Midwest, at $750. Although rents are clearly highest on both coasts, median asking rent in the Midwest is near its all-time high, and the median asking rent in the South is within $63 of its highest quarterly 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 $625 during the second quarter of 2006, which is $25 higher than in the first quarter and $22 more than a year ago. During the second quarter, the West had the highest median asking rent, at $775, followed closely by the Northeast, at $728. In the South, the median asking rent was $598, while in the Midwest it was $560.         

Because asking rent data on new apartments are volatile from quarter to quarter, and can change directions rather 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 increase of 1.6%, the rate of year-over-year increase in rents has been consistently positive ever since, and stood at 1.2% for the year ending June 2006. Some of the increase may be attributed to changes in the characteristics of the multifamily rental units being produced.

New units completed in 2005 were slightly larger than their 2004 counterparts. Median square footage rose from the record of 1,105 square feet in 2004 to 1,143 in 2005. Similarly, the share of new units completed in 2005 with 2 or more bedrooms rose by four percentage points, to 67%, and the share with two or more bathrooms also edged up, from 49% to 54%. [Asking rents for new apartments are another example of data that will become unavailable if HUD and the Census Bureau decide to discontinue the SOMA.]

The Condo Market Cools

In the second quarter of 2005, absorption rates for new condominiums and cooperatives² generally declined, but again tended to be higher than for rental units. This relationship has been consistent since 1999, with the exception of the third quarter of 2004. Nationally, the condominium absorption rate was 68% in the second quarter of 2005, down from a robust 755 in the first quarter of 2005. The highest absorption rate reported was 77% in the West, followed closely by the South at 71%. The Northeast was next, at 61%, and the Midwest reported an absorption rate of just 49% during the second quarter of 2005. While 49% 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 Midwest unfold over the next several quarters, if it is still possible to track them. [Absorption rates for condos are yet another example of the information that will be lost if the SOMA is discontinued.]

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 150,000 in 2005 . Despite solid growth in condo starts in 2005, this market appears to be cooling. While a record 51,000 condos were begun in the third quarter of 2005, only 35,000 were started in the fourth quarter of 2005, and 42,000 were started in the first quarter of 2006. While these recent quarterly start numbers are historically very high, they suggest that condo starts are retreating from the all-time highs of 2005.             

Sales of existing condominiums and cooperatives, meanwhile, have been steadily cooling from the torrid pace exhibited during the second and third quarters of 2005. For the whole 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% 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 June of 2006, existing condos sold at a seasonally adjusted annual rate of 805,000, a 10% decline from December 2005 and a 15% decline from June 2005. Further evidence of the slightly weakening demand for condos is their slowing rate of 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. However, during the first six months of 2006, median condo prices have barely budged. And in June 2006, the median condo price was $226,900—barely 1% higher that the price reported in December 2005, and several percentage points below the all-time high of $231,800 set in June 2005.³

----------------------------------

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 ]