by Calculated Risk on 1/08/2013 08:25:00 AM

Reis reported that the apartment vacancy rate fell to 4.5% in Q4, down from 4.7% in Q3 2012. The vacancy rate was at 5.2% in Q4 2011 and peaked at 8.0% at the end of 2009.

Some data and comments from Reis Senior Economist Ryan Severino:

Vacancy declined by another 20 bps during the fourth quarter to 4.5%. This exceeded performance during the third quarter when vacancy declined by 10 bps. On a year-over-year basis, the vacancy rate declined by 70 bps.

There was a bit of a resurgence in demand for apartment units during the fourth quarter when 45,162 units were absorbed. This represents an increase versus the 24,951 units that were absorbed during the third quarter but a slight decrease versus the 47,396 units that were absorbed during the fourth quarter of 2011. Net absorption has been consistently positive since the second quarter of 2009. For the calendar year 2012, 138,155 units were absorbed. This is a decline from the 172,707 units that were absorbed during calendar year 2011.This decline is not surprising. The market has tightened considerably over the last few years and at this point in the cycle a slight slowing should be anticipated.

New construction also increased during the quarter. 24,614 units were delivered during the fourth quarter, versus 17,378 units during the third quarter. This is also an increase compared to the 10,145 units that were delivered during the fourth quarter of 2011. This is the third consecutive quarter of construction increases and the highest level of quarterly completions since the second quarter of 2010. For calendar year 2012, 66,846 units were completed. This is an increase versus the 42,290 that were completed during 2011.

Asking and effective rents both grew by 0.6% during the fourth quarter. This was below the third quarter performance when asking and effective rents grew by 0.8% and 0.9%, respectively. Both asking and effective rents have consistently increased since the first quarter of 2010. However, this was the weakest performance since the fourth quarter of 2011. Nonetheless, taking a longer‐term view, on a year‐over‐year basis rent growth continues to accelerate. Nationally, asking and effective rents hit another all‐time high during the fourth quarter, propelled by strong demand, limited new supply growth, and a still weak for‐sale housing market.
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The outlook for 2013 remains stout. Although new completions are expected to accelerate substantially during 2013, demand should remain tight. With demand outpacing new completions, vacancy is expected to continue to decrease, but the rate of decline will slow as the market digests all of the new units coming online. However, given that tightness in the market will persist, rent growth will continue to accelerate – having shorn concessions landlords now feel empowered to raise face‐level asking rents in a more pronounced fashion. The majority of the market will continue to perform well in 2013 as their tenants will have no choice but to continue paying record‐level rents. The greatest risk likely resides in the highest‐quality properties with the most expensive rents, typically class A and above properties. Rents in these high‐quality properties are prohibitively expensive and tenants have already countenanced large annual rent increases. With housing prices remaining relatively low and mortgage rates hovering near record‐low levels, an increasing number of these class A/A+ tenants, who boast high incomes, ample savings, and good credit ratings, will do the math and decide that it is finally time to purchase a home.

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.

This was another strong quarter for apartments with the vacancy rate falling and rents rising. With more supply coming online in 2013, the decline in the vacancy rate should slow - but the market is still tight, and Reis expects rents to continue to increase.