Rental Demand Fundamentals     

The vacancy rate for buildings with 5 or more units stood at 10.4% for the three months ending September 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 9.9% in the third quarter of 2006, up slightly from 9.6% in the previous quarter and up from 9.5% during the first quarter of 2006 (Figure 1). 

Regionally, the highest vacancy rate was located in the Midwest, at 12.6% in the first quarter. That rate that was unchanged from the previous quarter, but down from 13.4% one year earlier. The West reported a vacancy rate of 6.5% in the third quarter of this year, down from 7.3% one year earlier. Vacancies in the Northeast came in at 7.7% for the period July-September, up 1.7 percentage points from the third quarter of 2005. The South weighed in with a 11.9% vacancy rate, which is up 0.8 of a percentage point from the second quarter, but unchanged from what it was a year ago.      

National absorption rates for new, unfurnished rental apartments  decreased by two percentage points to 67% for units completed in the third quarter of 2005.  This is down slightly from the 68% absorption rate recorded one year earlier, but is still the fourth-highest rate recorded since the third quarter of 2002 (Figure 2).

Regionally, the Northeast had the highest absorption rate at 82%, the South reported an absorption rate of 69% and the Midwest had an absorption rate of 66%. The West registered the lowest absorption rate at 62%. While the absorption rate in the Northeast rose by 6 percentage points from the second quarter of 2006, the rate in the Midwest declined by 10 percentage points, while rates in the other two regions were largely unchanged.

The formation of new households is another key indicator of the overall demand for multifamily housing. And while household formation has risen quite significantly since the middle of 2004 (Figure 3), multifamily household formation is now 400,000 below its recent high of 34.4 million set during the first quarter of 2006. This trend suggests that the rate of household formation may be slowing. but is still well above the lows registered during 2004.  

This general 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, there were about 35.5  million such households, and the number now stands at 34 million — up slightly from 33.8 million a year ago, but down slightly from 34.2 million in the second quarter of 2006. The number of renter households is now at its fourth-highest reading since the fourth quarter of 2002 — 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 Up

Median asking rents were $927 for rental units completed during the third quarter of 2005. Although that is down from the record asking price of $1,025 during the second quarter of 2004, it is the fifth-highest reading ever recorded, and it is $5 higher than the level of the previous quarter. This strongly suggests general improvement in this market.

Regionally, both the Northeast and the West continue to have the highest median asking rents, at over $1,150. These two high-price regions are followed by the South, with a median asking rent of $922, 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 $44 of its highest quarterly reading.

Perhaps not surprisingly, asking rents for existing apartments also have been generally improving, and also are at or near all-time highs (Figure 4). 

For all existing units, the median asking rent was $639 during the third quarter of 2006 — which is $14 higher than in the previous quarter — and $25 more than a year ago. During the third quarter, the Northeast had the highest median asking rent at $802, followed closely by the West at $756.  In the South, the median asking rent was $598 while in the Midwest it was $577.         

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 have calculated rents based on those moving averages. These data show that at present, rents are as high as they have ever been. While some of the increase is due to local economic conditions, another portion 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 — and to 1,154 during the second quarter of 2006. Similarly, the share of new units completed in 2005 with two 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%.  

Condos: Despite Slowdown, Pipeline Still Full

In the third quarter of 2005, absorption rates for new condominiums and cooperatives  generally declined, but once again tended to be higher than for rental units. This relationship has held consistently since 1999, with the exception of the third quarter of 2004. Nationally, the condominium absorption rate was 75% in the third quarter of 2005, down from a robust 80% in the second quarter of 2005. The highest absorption rate reported was 89% in the West, followed closely by the South at 87%. The Northeast was next at 56% and the Midwest reported an absorption rate of just 52% during the second quarter of 2005. While 52% 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.

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. However, things appear to be heating up in 2006. During the first quarter of 2006, there were 39,000 condos started, while 43,000 were started in the second quarter. These recent quarterly start numbers suggest that while condo starts have retreated from the all times highs of 2005, the retreat may be short-lived.              

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 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% percent) was recorded in the Northeast, which accounted for 37% percent of all existing condo sales last year.   

In September of 2006, existing condos sold at a seasonally adjusted annual rate of 763,000, a 15% decline from December 2005 and a 19% 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 nine months of 2006, median condo prices have barely budged. And in September 2006, the median condo price was $219,800, almost 2% lower than the price reported in December 2005, and 5% below the all-time high of $231,800 set in June 2005. [ return to top ]