At the same time, the supply of multifamily rental units is up: Why?New product is coming onto the market; older, unsold properties are offered as rental units as some condo complexes are being converted from condo to rental units; and some owners who are unable to sell their properties seek income by renting them to reduce their losses or even make a small profit. Thus, asking rents for new properties are up, even as absorption rates for new apartments are down.

Vacancy Rates Stay High

Rental vacancy rates for buildings with 5 or more units remained unchanged at 10.7% in the fourth quarter of 2008. That is the same as it was in the first and third quarters of last year, in spite of an upward pop to 11.1% in the second quarter of 2008. The third quarter rental vacancy rate is higher than the rates for 2006 and 2007, with only one exception—in the first quarter of 2007, it matched the current 10.7% rate. That was the only time over the 2006-2007 period that the vacancy rate exceeded 10.4%. The vacancy rate for all structures (including single-family units, which represent roughly 30% of rental units) rose to 10.1% in the fourth quarter of 2008, up from 9.9% in the third quarter. That is also up from 10.0% in the second quarter, and matches the 10.1% in the first quarter. This is higher than all quarters in 2006 and 2007, except for first quarter 2007, which matched the 10.1% rate. (Figure 1)

Regionally, only the rental vacancy rate in the Northeast improved. That vacancy rate fell from 6.7% to 6.3%, the lowest rate for all the regions. The South edged up modestly to 13.1% from 13.0% in the third quarter, which had been an improvement over second quarter’s 13.2% rate. The South won the dubious distinction of having the highest vacancy rate for all the regions. The Midwest had the next highest rate at 10.5%, up from third quarter’s 10.3% percent. Still, that was down from the first half of the year with a vacancy rate of 11.8% in the first quarter and 10.6% in the second. The West’s vacancy rate of 8.4% is up significantly from third quarter’s 7.6%. It also is up sharply from first and second quarter’s 7.0% and 6.9%, respectively. View Table 1.

Absorption Rates for New Apartments Falter

The national absorption rate for new, unfurnished rental apartments¹ fell to 48% (seasonally adjusted) for units completed in the second quarter of 2008. This is the lowest absorption rate in more than five years. It is down from a revised 53% for apartments completed in the first quarter of 2008 and from a recent high of 59% for apartments completed in the fourth quarter of 2007. Prior to this, the most recent low was 52% for apartments completed in the third quarter of 2006. (Figure 2) On a non- seasonally-adjusted basis, the national number was 53%. The Northeast region had the highest absorption rate at 58%. The West was lowest at 50%, and the Midwest and South were in the middle at 51% and 54%, respectively. All the regional absorption rates are not seasonally adjusted.

Except for a blip upward in the second quarter of 2008, homeownership has been flat or down since the third quarter of 2006 when it hit 69.0%. This, of course, means that the rentership rate generally has been rising over this same period. This trend is likely to continue for the near term—a positive for the outlook for rental properties.

Rents Move Downward

In the fourth quarter of 2008, for the first time since the third quarter of 2007, national median asking rents for existing vacant apartments faltered, falling from $719 to $704. However, they are still up almost 5% from fourth quarter 2007 when they were $673. Rents fell in every region of the country except for the Midwest, where they rose from $580 to $594. Even with this rise and declines elsewhere, the Midwest remained the most affordable, with the lowest median asking rent for all the regions. The next lowest median asking rent is the South at $680. The West, at $850 is the highest, a honor position it has held since the first quarter of 2007 when it edged out the Northeast, which had held the questionable honor in the second half of 2006. The Northeast had the biggest quarterly decline in both absolute dollars (down $44, from $847 to $803) and in percentage terms (down 5%). On a year-over-year basis, median asking rents were up in the Midwest and South, 4.9% and 4.0%, respectively, while they fell in the Northeast and West, 2.1% and 3.1%, respectively.

But Median Asking Prices for New Apartments Are Up

Meanwhile, counter to the national trend for existing vacant apartments, median asking rents for new apartments three months following their completion rose across the board. Nationally, the median asking rent in the second quarter of 2008 was $1,133, up from $1,111 in the first quarter. Median asking rents were up in all regions of the country. (Figure 3) The increase may reflect the fact that many projects that were originally slated to be for-sale properties (i.e., condominiums), were instead turned into rental properties, given the weakness in demand for condos. Since multifamily condos generally are larger and better appointed (e.g., more and/or more upscale bathrooms and other amenities) they generally ask (and command) higher rents. The availability of new rental properties with more amenities, even with higher asking rents, may explain the downward pressure on asking rents for existing apartments.

Absorption Rates for New Apartments Are Down

Nationally, absorption of new condominiums and cooperatives² fell in the second quarter of 2008 from 52% to 49%. That is the fourth quarter of decline since the absorption rate hit 64% in the second quarter of 2007. The absorption rate had run as high as 79% as recently as the second and third quarters of 2005. Clearly the low absorption rate is a reflection of the weak demand for housing and tighter credit conditions. The absorption rate rose strongly in the Northeast, from 44% to 53%. It edged up slightly in the West, from 52% to 53%. It fell in the South, from 61% to 53%. Meanwhile, it plummeted in the Midwest, from an already low 31% to an abysmal 17%. View Table 2.

The low absorption rate also may have been related to high asking prices for new condos. Nationally, the median asking price for condos completed in the previous three months rose from $334,600 in first quarter 2008 to $366,200 in second quarter 2008. That is the highest median asking price in more than a decade. Median asking prices were up in all the regions except for in the South ,where they fell from $315,000 in the first quarter of 2008 to $306,700 in the second quarter. The Midwest continued to hold the honor of the lowest median asking price, with second quarter 2008’s figure of $248,100.

Sales of existing condominiums³ are hardly stellar either. They were up a bit in December to 480,000 (at a seasonally adjusted annual rate) from November’s 470,000, their lowest in more than a decade. Meanwhile, the inventory of existing condos for sale stood at a relatively high 588,000 at the end of 2008. That translated into a 14.7 months’ supply of existing condos for sale, based on December 2008’s sales rate.

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.