MultiFamily Market Outlook

The most recent quarterly data show condo activity and prices declining across the board, while the rental market seems to be improving. Rental vacancy rates are improving, absorption rates are up as are rents, and the number of renter households is setting records. The upward trend in the number of renters has been sustained largely by minority households. Homeownership rates among minorities in the U.S. are considerably higher than they used to be, but nevertheless remain low compared to the homeownership rate for non-Hispanic whites

The rental vacancy rate for buildings with five or more units stood at 10.7% for the three months ending March 2008, up from 10.1% during the fourth quarter of 2007, and unchanged from 10.7% during the first quarter of 2007. The vacancy rate for all rental properties (of which 30% are single-family homes) stood at 10.1% in the first quarter of 2008, up from 9.6% in the previous quarter and unchanged from 10.1% during the first quarter of 2007 (Figure 1).

Regionally, the highest rental vacancy rate was found in the South, at 12.7% in the first quarter, up from 12.3% in the previous quarter but down from 13.1% recorded a year ago. The West reported a vacancy rate of 7.0% in the first quarter of this year, up from 6.8% in the previous quarter and up from 6.5% from 12 months ago.

The rental vacancy rate in the Northeast came in at 7.3% for the period January-March, up from 6.6% during the October-December quarter of 2007, and up from 7.1% 12 months ago. Meanwhile, the rental vacancy rate in the Midwest was 11.8%, up from 11.1% in the fourth quarter of last year but down from 12.1% during the first quarter of 2007.

The national absorption rate for new, unfurnished rental apartments¹stands at 60% for units completed in the second quarter of 2007, up from 51% in the prior quarter and down from 67% during the second quarter of 2006. The current rate is the highest rate recorded in 12 months (Figure 2). Regionally, the Northeast had the highest absorption rate at 85%, followed by the Midwest with a rate of 78%. The West was third with an absorption rate of 64% while the absorption rate in the South was an anemic 53% in the second quarter of 2007.

The rise in the absorption rate has been most dramatic in the Northeast, where it rose by 26 percentage points between the fourth quarter of 2006 and the second quarter of 2007, and by 34 percentage points over the past three quarters. By contrast, the only region to experience a decline in the absorption rate was the South. During the last 6-month and 9-month periods, the absorption rate fell by three and six percentage points respectively. In the Midwest the increases over the same periods of time were 31 and 22 percentage points. In the West the absorption rate improved by 13 percentage points during the past six months and by 10 percentage points over the past three quarters. In short, absorption rates are up for the latest 6-month and 9-month periods in three of the four regions of the country.

The formation of new households is another indicator of the overall demand for rental housing. In the first quarter of 2008, there was a slight decline in the total number of households, all of which was attributable to a decrease in the number of owner households. During the most recently completed quarter, the number of renter households remained unchanged at 35.7 million, while the number of owner households declined by 100,000 and now stands at 75.1 million. Interestingly, the number of owner households has actually been flat for about two years; there were 74.9 million owners during the first quarter of 2006 and just 200,000 more today. Given that the number of households grew by about 1.5 million over that period (almost all of which were renters) the rate of homeownership has necessarily declined somewhat.

As a result, the current number of 35.7 million renter households is higher than it has been at any time, surpassing the previous all-time high of 35.6 million set back in 1994. Moreover, in the most recent quarter the number of non-Hispanic white renter households declined by 100,000 from the fourth quarter and now stands at 19.6 million after jumping by 500,000 households in the fourth quarter of 2007. At the same time the number of minority renters has grown at a relatively constant pace.

Asking rents for existing vacant apartments also have been improving, and are at or near all-time highs (Figure 3). For all existing units, the median asking rent was $679 during the first quarter of 2008, which is $6 higher than in the previous quarter, $20 higher than a year ago, and just $21 off the all time high of $700. 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 $825, followed closely by the Northeast at $802. In the South the median asking rent was $661, while in the Midwest it was $568. In all areas except the South, median asking rents are essentially unchanged from where they were 12 months ago, while in the South rents are $38 higher than they were in the first quarter of 2007.

Quarterly asking rents for vacant units are not seasonally adjusted. Source: U.S. Census Bureau, Housing Vacancies and Homeownership

Perhaps not surprisingly, asking rents for new apartments also are signaling strength in the market. The median asking rent was $1,013 for apartments completed during the second quarter of 2007, $79 higher than the previous quarter, and $76 higher year over year, indicating general strength in the market for new rental apartments. Regionally, asking rents for new apartments continued to be highest in the West and the Northeast. The reported median asking rent was over $1,150 (the highest rent on the Census Bureau’s questionnaire) in both the West and Northeast. In the South the median asking rent was $997, and in the Midwest it was $750, reflecting a typical pattern among the four principle Census regions.

While some of the increase in asking rents may be due to strong demand relative to supply, some may simply reflect changes in the characteristics of the apartments being built. Apartments, for example, have continued to increase in size, although only at a slow pace — and that trend may be changing. Median square footage steadily rose from 1,143 square feet in 2005 to 1,172 in 2006 to 1,197 in 2007. However, during the fourth quarter of 2007, the median size of new apartments was 1,176 square feet, 21 square feet less than the average for the entire year, and during the first quarter of 2008 the median size was 1,180 square feet, also less than the average for all of 2007. At the same time, the share of new apartments with two or more bedrooms declined to 65% in 2006, from 67% in 2005 while the share with two or more bathrooms also edged down, from 54% in 2005 to 52% in 2006.

In the second quarter of 2007, absorption rates for new condominiums and cooperatives²generally 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 65% in the second quarter of 2007, up from 58% the previous quarter but down from 67% and 70% during the fourth quarter of 2006 and the third quarter of 2006 respectively. The highest absorption rate reported was 71% in the South, followed by the West at 68%. The Midwest was next at 55%, and the Northeast reported an absorption rate of just 48% during the second quarter of 2007. While 48% 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 Northeast 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 Northeast was as high as 68% just two quarters ago.

Until quite recently, production of new condominiums had been increasing dramatically. About 71,000 multifamily condos/coops were started 2002. This subsequently more than doubled to a record-setting 151,000 in 2006. Production was stronger in the first part of that year, however. During the first quarter of 2006, 39,000 multifamily condos were started. That number increased slightly to 42,000 in the second quarter, then declined to 37,000 in the third quarter, and 33,000 in the fourth quarter. During the first quarter of 2007, the number of condos started slumped to just 24,000 but rebounded to 35,000 in the second quarter and to 37,000 in the third quarter of 2007. Since then production has dropped dramatically. During the fourth quarter of 2007, condo starts totaled just 24,000 and during the first three months of 2008 condo production plummeted to just 17,000 units; exactly one-third of the quarterly peak of 51,000 recorded in the third quarter of 2005. Despite the recent declines, condominium construction during the last four quarters still adds up to 113,000 units — just below the 120,000 starts in 2004.

Sales of existing condominiums and cooperatives, meanwhile, are not only down from the torrid pace exhibited during the second and third quarters of 2005 but are now at their lowest level in several years.³In 2006, sales of existing condos were 801,000, representing a decline of about 10% from 2005 but still a strong showing. In contrast, sales during the fourth quarter of 2007 averaged just 597,000 units, down from 700,000 sales during the previous quarter. Sales during the first three months of 2008 averaged just 560,000, exactly 30% off the roughly 800,000 units sold during the first three months of 2007, and down almost 40% from all of 2005. Another negative sign is that during the most recent quarter, condo sales were down in all four Census regions compared to the prior quarter and compared to one year ago. The largest year-over-year decline of 32% occurred in the West, followed closely by a 28% decline in the Northeast. Sales declined 25% year-over-year in the South, and were down 17% in the Midwest.

Until recently, the behavior of prices had provided a bright spot in the market for existing condos. Median prices for existing condos showed double-digit percentage increases in 2003, 2004, and 2005, bringing them up to $223,900 by the end of the period. During 2006, the median price for existing condos inched slightly lower to $221,900. And while 2007 median prices for existing condos rose to a new high of $226,300 during 2007, prices peaked in July 2007 at $229,700 and have been steadily falling since. Condo prices finished the last quarter of 2007 at $221,100 and averaged just $216,900 during the first quarter of 2008. At this point condos have given up all the gains of the past few years and are now back to where they were three years ago.

Looking to the future, some multifamily developers have suggested that rising minority homeownership rates may be a strong source of demand for condos and co-ops. Compared to single-family detached homes, multifamily condominiums use land more intensively and for that reason, can be sold at lower prices within a given market area. This can provide a path to homeownership that would otherwise be denied to minority households, who on average tend to have lower incomes than households headed by non-Hispanic whites. Given recent turmoil in the subprime mortgage market, a condo-based approach to increased minority homeownership probably has more appeal than a policy that would relax credit standards.

Census survey data show that the home ownership rate for all minority households (Figure 4) has increased steadily since the first quarter of 1994, when it stood at 43.0%. Currently (in first quarter of 2008), the homeownership rate among minorities stands 50.3% — an increase of almost 20 percentage points for minorities, but still well below the 70+ percent rates that have prevailed consistently for non-Hispanic whites. The minority homeownership rate crossed the 50% mark for the first time in the third quarter of 2003 and reached an all-time high of 51.7% in the third quarter of 2006.

¹Defined as what percentage of privately financed, nonsubsidized, unfurnished units in buildings with five or more units are rented within 90 days of completion.

²Defined as what percentage of privately financed, nonsubsidized, unfurnished units in buildings with five or more units are sold within 90 of completion.

³Information on existing condominiums comes from National Association of Realtors monthly surveys.

MultiFamily Market Outlook - 05/28/2008 (Plain Text Version)

Rental Households Reach All-Time High