Apartment Market Reaches Inflection Point?

There are signs that overall apartment supply will finally outpace overall demand.

The U.S. apartment market has had a terrific run in the years since the end of the recession, but there are signs that overall supply will finally outpace overall demand, according to a recent Reis Inc. report on the market. Although the national vacancy rate was up only 10 basis points in the third quarter of 2015 compared with the second, which isn’t much of a movement, vacancies have continued to inch higher in recent quarters as construction remains strong. And the supply coming online is only going to get stronger, with a lot of projects currently in the pipeline. Thus, Reis predicts, in the next few quarters, vacancy increases are sure to accelerate because the market won’t be able to digest the new product.

Construction outpaced net absorption by more than 5,000 units during the third quarter nationwide. Year-to-date, completions have totaled about 127,000 units in 2015, about the same as in 2014. But the “key difference between this year and last is that the pipeline for new projects has swollen considerably over the last 12 months, and there are tens of thousands of units slated to hit the market during the fourth quarter of this year,” Reis senior economist and director of research Ryan Severino said in commentary provided to MHN.

Demand, though not imploding, was nevertheless down during the third quarter: the 34,135 units absorbed represent a roughly 30 percent decline compared with the previous quarter, some of which is seasonal (people tend to form households in the spring). Still, demand isn’t likely to implode, owing to favorable demographics. The number of 20 to 29 year olds who are the prime renting cohort, won’t peak until 2018. So while net absorption isn’t going to return to the superheated, post-recession levels of the early 2010s, it isn’t going to fall through the floor. Thus any softness in the apartment market is likely to be a function of supply rather than demand.

Rents are still on an upward course, at least for now, according to Reis. Asking and effective rents both grew by 1.3 percent during the third quarter. Year-over-year, the growth for both of those metrics was 4 percent—an acceleration from recent years, and in fact, the highest growth rate since before the recession. A lot of markets are still pretty tight, whatever’s in the pipeline. Some the top markets in terms of vacancy declines were in Florida—Jacksonville, Orlando, Tampa, Miami and Palm Beach—but New Haven, Conn., happens to be the tightest market in the country, with a scant 2 percent vacancy rate. The top three markets in the nation for rent growth in 3Q were Portland (Ore.), Seattle and San Francisco, all up 2.8 percent.