Multifamily rental properties are being affected by several forces: Demand is up due to foreclosures, and householders’ fear of purchasing a single-family house or a condo unit, which is driving the homeownership rate down and the rentership rate up. At the same time, the  supply of multifamily rental units is up as new product comes on the market and as older, unsold properties are offered as rental units. Additionally, some condo complexes are converted from condo to rental units, and some owners who are unable to sell their property seek income by renting their property to reduce their losses or even make a small profit. The net result of these conflicting forces was that asking rents for new properties were up from the previous year everywhere except the Midwest.

Vacancy Rates Improve, but Remain High

Following record-setting high vacancy rates in the third quarter of 2009, rates eased a bit in the fourth quarter. Overall rental vacancy rates fell to 10.7% from 11.1% in the third quarter. However, that was still up from 10.1% in fourth quarter 2008¹. This is the second-highest vacancy rate recorded since collection of these data began in 1956.

The vacancy rate for smaller structures (2 to 4 units) was flat at 9.5% in both the third and fourth quarters of 2009, but was up substantially from the 8.7% recorded in the fourth quarter of 2008. Rental vacancy rates for buildings with five or more units dropped to 12.5% from the 2009 third quarter’s 13.1% — also the second-highest rate on record since reporting of these numbers began in 1968. That was up from 11.2% in the fourth quarter of 2008. (Figure 1)

The fourth quarter regional rental vacancy rates all rose from their levels one year ago. All but the Midwest were down from their third quarter levels. The South and the Midwest had the highest vacancy rates, both coming in above 10%. On a year-over-year basis, the South rose from 13.1% to 13.7%, while the Midwest increased from 10.5% to 11.2 %. The South also had the dubious distinction of having the highest vacancy rate among the regions, a position it has held since it displaced the Midwest for the “honor” in the fourth quarter of 2006. Meanwhile, the vacancy rate for the West went from 8.4% in fourth quarter 2008 to 8.9% in fourth quarter 2009, and the Northeast rose from 6.3% to 7.2% over the same period. The Northeast had the largest increase in year-over-year vacancy rates for all the regions. (Table 1)

Absorption Rates for New Apartments Jump in the Midwest

The national absorption rate for new, unfurnished rental apartments² in the third quarter of 2009 fell to 48% (seasonally adjusted) for units completed in the previous three months, down from 53% in the second quarter of 2009. This returns the measure to the same level recorded for the absorption rate for new apartments in the third quarter of 2008. (Figure 2)

On a not-seasonally-adjusted basis, the national number fell to 51% from 52% for the same quarter the previous year. The Midwest region displaced the Northeast as the region with the highest absorption rate. The Midwest’s 75%, significantly higher than the 51% reported in third quarter 2008, put it ahead of the Northeast’s 60%, which was up marginally from its rate of 58% a year ago. The South more or less held its own with a 52% absorption rate, down only a bit from its previous year’ rate of 54%. The absorption rate for the West fell dramatically to 38% from its previous year’s level of 50%. That 38% is the lowest rate on record for the West since the Census Bureau began reporting these numbers in 1994. (Table 2)

The homeownership rate returned to its downward trajectory in the fourth quarter of 2009, falling to 67.2% from 67.6% in the third quarter. That is the lowest homeownership rate since September 2000. The peak homeownership rate (and the highest rate on record) was in the fourth quarter of 2004 when it hit 69.2%. Although the homeownership rate is down, it is still up from a little over a decade-and-a-half ago, when the measure stood at 63.7% (first quarter 1993). The fall in the homeownership rate, of course, means that the rentership rate has risen. Rising foreclosures into early 2010, as many forecasters predict, would continue to push the homeownership rate down and the rentership rate up — a positive for the outlook for rental properties, especially given the slowdown in multifamily housing starts. (Figure 3)

Rents on Existing Apartments Are Mixed

National median asking rents for existing vacant apartments dropped from $716 in the third quarter of 2009 to $680 in the fourth quarter. That was also down from $704 in the fourth quarter of 2008. However, the Northeast and West regions of the country registered year-over-year increases in their median asking rents. The Northeast rose from $803 to $870, an 8.3% increase, and the West from $850 to $866, up 1.9%. Meanwhile, in the South, median asking rents fell from $680 in the fourth quarter of 2008 to $643 in fourth quarter 2009, a 5.4% decline. The Midwest continued as the most affordable area, with a median asking rent of $580 — down 2.4% from its median rent of $594 last year at this time. While vacancy rates are falling everywhere but in the Midwest, the national average is high, and there is likely to be downward pressure on rents during the first quarter of this year. (Table 3)

Median Asking Rents for New Apartments are also Mixed

Median asking rents for new apartments were up nationally, but mixed regionally in the third quarter of 2009 (for apartments three months after completion in the second quarter), compared to their levels a year ago. Nationally, they rose to $1,153 from $1,133 in third quarter 2008. That also was up from $1,002 in second quarter 2009. Median asking rents for new apartments were down in the Midwest and West regions of the country. The Midwest, which continued to be the region with the lowest median asking rent, saw that rent fall to below $850 from $1,043 the previous year. Meanwhile, the West showed a decline on a year-over-year basis to $1,231 from a median asking rent that had topped $1,250. The Northeast, with the highest median asking rent of all the regions, continued with a median rent in excess of $1,250. The median asking rent for the South rose from $1,083 in third quarter 2008 to $1,142 in third quarter 2009. (Table 4)

Absorption Rates for New Condos Generally Down

Absorption rates of new condominiums and cooperatives,³ with the exception of the Midwest, were down in the third quarter of 2009. Nationally, they fell from 49% in the third quarter of 2008 to 35% in the third quarter of 2009. The absorption rate in both the South and West were down significantly from their 2008 rates. Both had an absorption rate of 53% in third quarter 2008. The South plummeted to 23%, while the West sank to 31% in the third quarter 2009. By contrast, the Northeast’s decline from 53% to 46% over that same period seems modest. Undoubtedly, the low absorption rates are a reflection of the weak demand for housing and tight credit conditions. However, in spite of these forces, there was a strong rebound in the absorption rate in the Midwest, whose rate jumped from 17% to 46%. (Table 5)

Asking Price for Condominiums Generally Up

The general decline in absorption rates for new condos may be due to increased asking prices for those condos. Nationally, the median asking price in the third quarter of 2009 for condos completed in the previous three months rose to more than $400,000 from $366,200 in third quarter 2008. Median asking prices rose sharply in both the Midwest and the South. In the Midwest, median asking prices rose 11% in the third quarter of 2009 from the same quarter in 2008, from $248,100 to $275,200. Over that same period, median asking prices jumped 22% in the South, from $306,700 to $372,900. In both the Northeast and West, median asking prices remained higher than $400,000 in third quarter 2009, where they have been since third quarter 2008. (Table 6)

Sales of existing condominiums⁴, fell dramatically in December and January following their November 2009 peak. The November 2009 peak sales rate of 782,000 (at a seasonally adjusted annual rate) — the highest level of sales since February 2007 — was probably given a big boost by the first-time home buyers tax credit, which was expected to expire at the end of that month. As it happens, the tax credit was extended and expanded to repeat home buyers in early November (see www.FederalHousingTaxCredit.com for details).

Condo buyers who wanted to qualify for the then-expiring tax credit had until the end of November to complete the purchase of their condo (i.e., go through settlement). Even with the extension of the tax credit, purchasers were unlikely to change their plans, given they had obtained financing and arranged a settlement date, not to mention had signed a sales agreement with a specific settlement date. Since existing condo sales are reported when the sale, or settlement, actually occurs, it is not surprising that November sales were relatively high. By the same token it is not surprising that December and January sales were down. December condo sales were down 13.7% from November to 675,000, and January 2010 was down another 8.1% to 620,000. Nevertheless, both December and January sales were up 38% on a year-over-year basis. (Figure 4)

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