Q4 2015 Apartment Trends
National Apartment Market
The national vacancy rate rose by 10 basis points in the fourth quarter – to 4.4 percent. This is the second consecutive quarter that national vacancies have risen, but these patterns do not necessarily suggest a massive weakening in apartment fundamentals. If anything, this was right in line with our forecasts at the beginning of 2015 that vacancies would finally begin to rise, after being stuck in the low 4s for a couple of years. Demographics and demand remain strong, but developers brought close to 200,000 units online in Reis’s 79 largest markets, pushing vacancies up in even places like Denver or Seattle, where the question of whether robust job creation and a vibrant economic environment could outweigh the thousands of apartments coming online. No, it couldn’t, and it didn’t. The vacancy rate in Denver rose from 4.3 to 5.1 percent in 2015, and in Seattle it rose from 4.7 to 5.3 percent. Denver and Seattle added what was in effect anywhere from three and a half to four percent of new inventory in 2015, and that exerted upward pressure on vacancies.
With that said, the apartment sector also had a banner year in terms of asking and effective rent growth – the other major driver of top line revenues, aside from occupancy rates. Asking rents grew by 4.6 percent at the national level, and effective rents grew by 4.7 percent. Those figures are stronger than the peak years in 2006 and 2007, and one would have to look back to the period from 1999 to 2000 to find rent growth figures that were comparably strong – and back then vacancies were in the low three’s.
So where is multifamily heading?
Supply and Demand Trends
Our expectations for multifamily have not changed. We expect vacancies to rise through the end of our five year forecast period, but if this comes to pass and national vacancies end 2020 in the low 5’s, that just doesn’t spell doom and gloom for multifamily properties. Supply growth for 2016 will likely be stronger than the past year’s, adding to the upward pressure on vacancies, but this is not news either. If anything, there is anecdotal evidence of finance sources throttling back on apartment developments, waiting and seeing whether new properties that opened their doors lease up at an acceptable rate before they green light new investments.
What we are projecting for the multifamily sector is very much a soft landing, with ample runway for rent increases despite worries of median household income and wages not catching up. Now, that doesn’t mean rent growth won’t be cramped by rising vacancies – already, concessions are making their way back to places hardest hit by new supply. It just means that overall, while market players may need to backpedal on the most optimistic of double digit growth rate projections, demand and supply conditions for multifamily remain healthy. The riskiest play, as always, will be those submarkets and neighborhoods enduring large amounts of new supply – they face the larger risks of income loss and occupancy deterioration if we are struck by a recession over the next five years.