Rental Market Still Stalled, Condos Still Hot
Michael Carliner, Staff Vice President, NAHB Economics Group
Fourth quarter 2003 was an instant replay of the third quarter: The rental market remained stalled while the condo market gained momentum. Although local markets varied, apartment rentals across the country generally continued to experience rising vacancies, slow absorptions, and downward pressure on rents. In contrast, condos continued to gain strength.

Rental apartment production has slowed—although not enough to fully reflect the absence of demand—and condo starts have picked up. In 2003, rental starts fell to 262,000, down from 275,000 in 2002. The number of condo units started increased from 71,000 to 86,000.

Glutted Markets a Real Possibility

Completions of both condo and rental units declined in 2003 and were lower than starts, producing an increase in the number of units in the construction pipeline. The total number of multifamily units under construction at the end of January 2004 was 373,200 (not seasonally adjusted), compared to 333,000 a year earlier. Part of the increase in units under construction is due to an increased share of production that involves larger structures – they take longer to complete. In any case, with more than a full year’s output currently under construction and little evidence of a slowdown in additional starts, it looks as if markets with excess supply will become even more glutted.

The nation’s overall rental vacancy rates averaged 9.8% in 2003, with the rate for structures with five or more units at 11.4%. The vacancy problem worsened over the course of the year, with the overall rate reaching a record 10.2%, and the rate for 5-plus structures at 11.9%, in the fourth quarter.

Condo Prices Jump 15 Percent

The median price of existing condo units sold in 2003 was $163,800, 15.2% higher than in 2002, according to the National Association of Realtors. Indeed, the median condo resale price in the fourth quarter of 2003 – $174,700 – was above the median reported for re-sales of single-family homes.

For newly built condos (in buildings with 5 or more units) completed in the third quarter of 2003, the median asking price was $198,600. This was lower than the median for condos completed a year earlier, although comparisons over time may not be terribly meaningful as measures of prices for comparable units because of changes in the mix of products and locations. That problem with median price comparisons also is present, but less severe, for existing condos and for single-family homes.

Bright Spots and Black Holes

Not every market, however, is overbuilt and facing weak demand. Table 1 shows a variety of measures for major multifamily markets. Especially in the Northeast and in southern California, vacancies are modest, rents are rising, and absorption rates are high.

In much of the South and Midwest, however, there are serious problems. In most cases where vacancy rates are high, there were declines in multifamily construction initiated in 2003, but the large volumes currently under construction will not easily be absorbed, and further cutbacks in starts are likely and desirable.

In metropolitan areas such as Houston, where there was a large increase in permits despite excess supply, the situation could become much worse. Some areas with high vacancy rates, however, such as Atlanta, Orlando, and perhaps San Antonio, already have seen growth in employment and population, suggesting that the excess supply could be absorbed more quickly than in less dynamic areas. The data on vacancy rates and absorptions at the metropolitan area level are based on relatively small samples and are less reliable than the national and regional measures, but in combination with other information, such as employment, population, and construction statistics, they show where markets are strong or weak. Both the level and the direction of vacancies and absorptions should be considered in market assessments.

The CPI rent index, for the metropolitan areas where it is available, generally is consistent with the demand measures. The rent indexes were stagnant or declining in Atlanta, Dallas, Denver and Seattle, as well as in the San Francisco-Oakland-San Jose consolidated area, where times are tough despite still-low vacancies. The CPI does not, however, fully account for the rent concessions that are common in weak markets. To construct the CPI, apartment residents are interviewed every 6 months. If residents report that they are getting temporary free rent, the average rent projected over the next six months is recorded (even though the resident may not be required to stay for another 5 months). If the resident is interviewed more than a month after the concession period expires, the current rent is recorded, without adjusting for previous concessions.
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