Rental Demand Fundamentals     

The vacancy rate for buildings with 5 or more units stood at 10.7% for the three months ending March 2007, up from 10.1% during the fourth quarter of 2006, and up from 10% during the first quarter of 2006. The vacancy rate for all rental properties (of which 30% are single-family homes) stood at 10.1% in the first quarter of 2007, up slightly from 9.8% in the previous quarter and up from 9.5% during the first quarter of 2006 (Figure 1). 

Regionally, the highest vacancy rate was found in the South, at 13.1% in the first quarter, up from 12.4% in the previous quarter and up from 10.9% recorded a year ago. The West reported a vacancy rate of 6.5% in the first quarter of this year, down from 7.0% in the fourth quarter and down from 6.7% a year ago. 

Vacancies in the Northeast came in at 7.1% for the January-March period, up from 6.5% during the October-December quarter of 2006, but down slightly from 12 months ago when it was 7.3%. Meanwhile, the Midwest weighed in with a vacancy rate of 12.1%, up two-tenths of a percentage point from the fourth quarter and down five-tenths of a percentage point from what it was a year ago.
      
National absorption rates for new, unfurnished rental apartments¹ stood at 59% for units completed in the first quarter of 2006, unchanged from the fourth quarter of 2005. Not only is this slightly down from the 60% absorption rate recorded in the first quarter of 2005, it is the third-lowest rate recorded since the start of 2003 (Figure 2). 

Regionally, the South had the highest absorption rate at 63%, with the Northeast second at 57%. The Midwest held steady with an absorption rate of 55% while the absorption rate in the West was 54%. Moreover, the absorption rate fell by 17 percentage points in the Northeast between the first quarter of 2005 and the first quarter of 2006, and the rate in the West declined by 11 percentage points during the same period of time. By contrast, the absorption rate rose by one percentage point in the Midwest, and by four percentage points in the South.   

New Households Spurring Rental Demand
       
The formation of new households is another key indicator of the overall demand for multifamily housing. In the first quarter of 2007 the number of total households declined slightly, about 200,000 households.

Interestingly, the decline is due mainly to a decrease in the number of homeowner households—800,000. In contrast to that, the number of renter households saw a dramatic increase of about 600,000 (Figure 3). 

The jump takes the total number of renters in this country up to 34.7 million households—higher than at any time since the fourth quarter of 1999 and within 1 million households of the all-time renter high of 35.7 million set back in 1994. 

This recent spike suggests that the rate of multifamily household formation may be on the rise again after a number of years of essentially treading water. The number of renter households is now at its highest reading since the start of fourth quarter of 1999, and up from a cyclical low of 33.1 million during the last two quarters of 2004.

The general growth in households over the past several years helps explain the first sustained increase in renter households since more than 10 years ago. Newly formed households tend to be renters rather than owners.    

Asking Rents Near Record-Setting Levels

Median asking rents reached $1,013 for rental units completed during the first quarter of 2006. Although that figure is lower than the record asking price of $1,025 set during the second quarter of 2004, it is nevertheless the second-highest reading ever recorded. 

Regionally, the Northeast and the West continue to have the highest median asking rents, with the reported median asking rents in both places at more than $1,150. These two high-priced regions are followed by the South, with a median asking rent of $953, 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 $13 of its highest quarterly reading ever.   

Because data on the asking rents of new apartments are volatile from quarter to quarter and can change directions rather quickly, NAHB has constructed a four-quarter moving average to more easily see trends. The calculated rents based on the moving averages show that current rents are within $14 of their all-time high. 

Although some of the increase is due to local economic conditions, some 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 then-record level of 1,105 square feet in 2004 to 1,143 square feet in 2005 and to 1,171 square feet in 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%.  

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

 For all existing units, the median asking rent during the first quarter of 2007 stood at $659, which is $41 lower than in the previous quarter, but $20 more than in the third quarter of 2006. It’s also close to $60 higher than a year ago. Moreover, this is the second highest median asking rent for existing apartments ever recorded. During the first quarter, the West had the highest median asking rent at $835, followed closely by the Northeast at $801. In the South the median asking rent was $623, while in the Midwest it was $570. In all areas median asking rents are at or near their highest levels ever. 

The Condo Market Holds Its Own

In the first quarter of 2006, absorption rates for new condominiums and cooperatives²  generally held constant, but once again tended to be higher than for rental units—a relationship that has held consistently since 1999 (with the exception of the third quarter of 2004).

Nationally, the condominium absorption rate was 69% in the first quarter of 2006, up slightly from 68% in the fourth quarter of 2006, but down from 75% during the first quarter of 2005. The highest absorption rate reported was 86% in the South, followed by 79% in the West. The Midwest was next at 39%, and the Northeast reported an absorption rate of just 21% during the first quarter of 2006. While 21% 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. NAHB will be watching the Northeast over the next several quarters to see whether the recent decline is the start of a trend or simply a cyclical event. The absorption rate in the Northeast during the first quarter of 2005 was just 28%. 

Over the past several years, condominium production increased dramatically. There were 71,000 multifamily condos/coops started in 2001 and 2002. By 2006, that number had doubled to more than 150,000 units. ³

A closer look at numbers shows that, despite the slowdown in the for-sale housing market, condo production at year’s end 2006 remained significantly high by historical standards, coming in at an annualized rate of 136,000 units. Given the relative weakness in condo prices and the strength in rents, it is hard to know whether supply is being constrained enough for the market to have actually bottomed out.

The slowdown in sales of existing condominiums and cooperatives seems to be finding a bottom as well. For all of 2005, there were 896,000 existing condos/coops sold—a 9% improvement over 2004, which was itself up about 12% from the previous year. And while 2006 sales of existing condos were 801,000, representing a decline of about 10% from 2005, sales during February and March 2007 have averaged around 800,000 units, suggesting that the worst may be behind us. 

Another positive sign is that during March, condo sales across all four Census regions were well above the recent lows registered in late 2006 and January 2007. The largest rise (83%) was recorded in the West—while the South (58%), Northeast (50%), and Midwest (37%) experienced milder yet still major increases.

Further evidence of a possible rebound in demand for condos can be seen by looking at rates of appreciation. Median condo resale prices had steadily increased in 2003, 2004, and 2005. By 2006, median condo resale prices began to decline. However, during the first three months of 2007 median condo prices have risen from a low of $222,600 in January and February to $228,200 in March, which is well above the recent monthly cyclical low of $213,100 in October 2006.

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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 days of completion.                                                                                               ³  All price and sales information for existing condos comes from National Association of Realtors monthly surveys.