A Glass Half Full
Vacancy rates for all apartment buildings with 5 units or more declined to 12.1% from 12.5% in the previous quarter, according a National Multi-Housing Council (NMHC). The national vacancy rate dropped to 7.2% from the prior quarters 8.2%, the lowest level for first quarter vacancy rates since late 2008. Local markets point to the South and West being the weakest rental markets with while the Northeast had the lowest vacancy rate, coming in at 5%.
Although effective rent fell by 2.3% over last year, it was more than half the 5.6% decline of 2009. Rent declines have not only slowed but have finally reversed. The chart above points to the early beginnings of a reversal in trend. But investment properties will depend on a stronger rebound. We’ll need to see significant job growth to support a continuing rent rate recovery.
Longer Term Prospects look strong:
- We will have a recovery
- The sector did not participate in the building boom that the residential markets have seen and so supply is tight
- The demographics are favorable. Echo boomers are coming to market and active retirees are looking at rental units or senior complexes in cities.
- The politics are favorable and capital has not completely dried up. Congress recognizes the need for housing and Fannie Mae and Freddie Mac are being mandated to keep capital flowing to rentals as a matter of social policy.
Time To Buy?
Absorption of investment grade apartments in the first quarter rose to 21,369, up 5,785 from the previous quarter and up 58,333 year over year, making it the best first quarter performance in 10 years, NMHC reports. Meanwhile, rental unit completions dropped 6,481 over last year, reflecting a shrinking supply of rental units.
Prices Still Dropping
According to the National Council of Real Estate Fiduciaries (NCREF), investment grade rental property values declined in the fourth quarter, falling 1.0% from the previous quarter and 14.2% year over year.
Sales Volume Improving
“There is clear improvement in apartment market conditions on all fronts,” said NMHC Chief Economist Mark Obrinsky. Sales volume is up, debt and equity are more available and markets are tighter (read supply)”. The apartment sector may well be the first to recover as the overall economy emerges from this great recession.