Rental Demand Shows Some Regional Strength

The vacancy rate for buildings with 5 or more units stood at 10.1% for the three months ending June 2007, down from 10.7% during the first quarter of 2007, and down from 10.4% during the second quarter of 2006. The vacancy rate for all rental properties (of which 30% are single-family homes) stood at 9.5% in the second quarter of 2007, down from 10.1% in the previous quarter and down just slightly from 9.6% during the second quarter of 2006 (Figure 1). 

Regionally, the highest vacancy rate was found in the South, at 11.5% in the second quarter, down from 13.1% in the previous quarter but up from 11.1% recorded a year ago. The West reported a vacancy rate of 6.7% in the second quarter of this year, up from 6.5% in the first quarter but down from 6.8% 12 months ago. 

Vacancies in the Northeast came in at 7.4% for the period April-June, up from 7.1% during the January-March quarter of 2007, and also up from 6.9% 12 months ago. Meanwhile, the Midwest weighed in with a vacancy rate of 11.1%, down one percentage point from the first quarter and down one and-a-half percentage points from what it was a year ago.
      
National absorption rates for new, unfurnished rental apartments¹ stands at 57% for units completed in the third quarter of 2006, down from 67% during the second quarter of 2006 and the third quarter of 2005. Moreover, the current rate is the lowest rate recorded since the start of 2003 (Figure 2). 

Regionally, the South had the highest absorption rate at 59%, followed by the Midwest with a rate of 56%. The West was third with an absorption rate of 54%, while the absorption rate in the Northeast was an anemic 51% in the third quarter of 2006. Of particular concern is the fact that the absorption rate fell by a full 31 percentage points in the Northeast between the third quarter of 2006 and the third quarter of 2005, while the rate in the Midwest and the South declined by 10 percentage points during the same period of time. In the West, the absorption rate declined by a relatively modest eight percentage points during the same 12-month period. In short, absorption rates are down for the latest three-month and twelve-month period in each and every region of the country.   

New Households Spur Rental Demand
       
The formation of new households is another key indicator of the overall demand for multifamily housing. In the second quarter of 2007, the total number of households jumped by a sizeable 600,000 households. Interestingly, the jump is composed of a rise of 300,000 home owner households and an increase of 300,000 renter households (Figure 3). 

With this large rise, the current 35.1 million multifamily households is higher than at any time since the second quarter of 1998, and is within 600,000 of the all-time high of 35.7 million set back in 1994. This recent sizeable upswing suggests that the rate of multifamily household formation is once again on the rise after a long period of essentially treading water.  

Interestingly, the recent growth in renter households over the past year-and-a-half has been accomplished with virtually no growth in the number of home owner households. In the fourth quarter of 2005 there were 75.2 million home owner households and 33.7 million renter households. Now there are 75.3 million home owner households—an increase of 100,000 home owner households—and 35.1 million renter households—an increase of 1.4 million renter households. Newly-formed households tend to be renters rather than owners.          

Asking Rents Are Healthy, even Record-Setting

Median asking rents were $1,052 for rental units completed during the third quarter of 2006, breaking the previous high of $1,025 set during the second quarter of 2004. Moreover, the current asking price is $115 higher than in the second quarter of 2006, and $125 higher than in the third quarter of 2005. This strongly suggests general improvement in this market. Regionally, the Northeast, the West, and the Midwest have the highest median asking rents, with the reported median asking rents in all three places at more than $1,150. While these rent levels are quite common in the West and the Northeast, this is the first time rents levels have reached these heights in the Midwest. Until this most recent result, the highest median asking rent in the Midwest was $854, set in fourth quarter of 2004. It will be very interesting to see if this rent level is sustained in the Midwest or if it returns to more traditional levels.      

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 was $665 during the second quarter of 2007, which is $6 higher than in the previous quarter and exactly $40 more 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 $814, followed closely by the Northeast at $741. In the South, the median asking rent was $644, while in the Midwest it was $573.  In all areas median asking rents are at or near their highest levels ever.             

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 the moving averages. These data show that at present, asking rents are $21 higher than the previous all-time high of $973 set in 2004. 

While some of the increase is due to local economic conditions, 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 then-record level of 1,105 square feet in 2004 to 1,143 square feet in 2005, and to 1,172 square feet in 2006. And, during the first quarter of 2007 the median square footage jumped another 19 square feet and now stands at 1,191. Interestingly, the share of new units completed in 2006 with 2 or more bedrooms declined by two percentage points, to 65% from 67% in 2005, and the share with two or more bathrooms also edged down slightly, from 54% in 2005 to 52% in 2006.  

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. This is a relationship that has held consistently since 1999, with the exception of the third quarter of 2004. Nationally, the condominium absorption rate was 70% in the third quarter of 2006, unchanged from 70% in the second quarter of 2006, but down from 75% during the third quarter of 2005. The highest absorption rate reported was 79% in the South, followed by the West at 71%. The Northeast was next at 59%, and the Midwest reported an absorption rate of just 45% during the third quarter of 2006. 

While 45% 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 to see if the recent reading is the start of a trend or if it is simply a result of something unusual, since the absorption rate in the Midwest was 66% in the previous quarter.  

Until recently, condominium production increased dramatically. There were 71,000 multifamily condos/coops started in 2001 and 2002, 87,000 in 2003, 120,000 in 2004 a stunning 150,000 in 2005,³  and a record-shattering 151,000 in 2006, That suggests that, anecdotal evidence to the contrary, on an annual basis,construction activity in this sector has not slowed. However, a closer look at numbers is warranted. During the first quarter of 2006 39,000 condos were started, that number jumped slightly to 42,000 in the second quarter, then declined to 38,000 in the third quarter of last year, and to just 34,000 in the fourth quarter. However, during the first quarter of 2007, the number of condos started fell to just 24,000—well off the peak of 51,000 in the third quarter of 2005, and the lowest level since the first quarter of 2004. 

Sales of existing condominiums and cooperatives, while down from the torrid pace exhibited during the second and third quarters of 2005 may not have bottomed out. 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. In 2006, sales of existing condos were 801,000, representing a decline of about 10% from 2005 but still a strong showing. 

By contrast, sales during the months of April, May, and June, 2007, averaged about 767,000 units, but were weakest in June. In that month, sales came in at just 740,000 units, almost 10% off the roughly 800,000 units sold during the first few months of 2007, and the lowest reported monthly total in quite some time. More ominously, sales in June 2007 were down 6.3% from the prior month, and down 6.6% from a year earlier. All this suggests that the worst may not yet be behind us. Another negative sign is that during June, condo sales were down in all four Census regions compared to the prior month and compared to one year ago. The largest year-over-year decline of 18% occurred in the West, followed closely by a 13% decline in the South. Sales declined 7% year-over-year in the Midwest, and were down 0.3% in the Northeast. 

The only bright spot in the condo market is the slight strengthening of demand reflected in rates of appreciation. Median condo resale prices spurted by 18%, 17%, and 14% in 2003, 2004, and 2005 respectively, bringing them to levels of $168,500, $197,100, and $223,900 for those three years. During 2006, the median condo resale price declined by about 1% to $221,900. However, during the first six months of 2007, median condo prices rebounded from a low of $222,600 in January and February to $228,900 in June, which is well above the recent monthly cyclical low of $213,100 in October 2006, and is 2.6% above the price in June 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 of completion.
 ³ All condominium price and quantity information come from National Association of Realtors monthly surveys. [ return to top ]