by Calculated Risk on 10/02/2014 10:46:00 AM

Reis reported that the apartment vacancy rate increased in Q3 to 4.2% from 4.1% in Q2.  In Q3 2013 (a year ago), the vacancy rate was at 4.3%, and the rate peaked at 8.0% at the end of 2009.

Some comments from Reis Senior Economist Ryan Severino:

The national vacancy rate increased by 10 basis points to 4.2% during the third quarter. This is the first quarterly increase in vacancy since the fourth quarter of 2009. This is something that we have been warning about for some time. The national vacancy rate has been below 5.5% since the third quarter of 2011, a virtually unprecedented run. Ultimately, market conditions that tight were going to serve as a catalyst for new construction activity. Although the surge in construction occurred a bit late, due to the fallout from the Great Recession, it is now arriving. New construction continues to increase over time and will likely reach a post‐recession high this year. Meanwhile, demand has clearly declined from levels observed during 2010 and 2011. This type of slowing is expected, but demand should remain robust. The number of 20‐ to 30‐year olds, the prime rental cohort, will not peak until 2018 which should keep demand rather stout. However, the apartment market, like virtually all property types, is cyclical, and has a propensity to overbuild, even when things are booming. With construction anticipated to outpace net absorption over the next four years, we expect the national vacancy rate to slowly drift upward. However, we do not foresee a massive expansion in vacancy rates of the sort that accompanies recessions.
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Nonetheless, 4.2% is still an incredibly tight market environment. Even as vacancy drifts slowly higher in the coming years, we do not anticipate that it will not surpass 5% by the end of the forecast horizon in 2018.

Construction overtook demand by a relatively wide margin during the third quarter, with a difference of 8,822 units. The 46,055 units delivered were just behind the fourth quarter of 2013's 47,950 units which are a post‐recession high. Moreover, completions this quarter were higher than completions for all of 2011 at construction's trough. In retrospect, the pullback in completions during the early stages of this year was at least partially attributable to the inclement weather experienced throughout much of the country. Once the weather improved, construction levels accelerated quickly. The market remains posed to deliver the highest level of new completions since 1999 when the economy was booming. That stands in contrast to today when economic growth is accelerating, but hardly booming.

However, net absorption has not ground to a halt. Though down from levels during 2010 and 2011, year to date, net absorption is actually tracking ahead of last year's pace, demonstrating just how strong demand remains ‐ despite the fact that the recovery in demand began four and a half years ago. Demographics are supporting demand. The most common age in the United States is 22, followed closely by 23, and then 21. There are a lot of young people in the market that are predominantly renters and not homeowners. This will continue to provide significant demand, even as new supply growth accelerates.
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Asking and effective rents both grew by 1.0% during the third quarter. This is an increase from the second quarter and reflective of the seasonality often observed in the apartment market. Rents tend to grow the fastest during warmer months which are more conducive to moving and greater demand for apartment units, all else being equal. Year‐over‐year growth in rents appears to have stalled a bit this quarter. The 12‐month change in rent growth for asking and effective rents is 3.2% and 3.4%, respectively.
emphasis added

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.


Apartment vacancy data courtesy of Reis.