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More Households, Better Rental Absorption, Higher Condo Prices
by Elliot F. Eisenberg, Ph.D.
Both the rental and for-sale segments of the multifamily industry have shown overall improvement—in some cases, record improvement—during the just-completed third quarter of 2005.
This quarterly update and analysis takes a closer look at the major industry indicators, and begins on the rental side with: Vacancy rate; Absorption rate; Household formation; and Asking Rent data.
Rental Demand Fundamentals
Most of the variables that measure multifamily rental demand indicate a slowly improving situation. The vacancy rate for buildings with five or more units stood at 10.8% for the three months ending September 2005, up from 10.2% during the second quarter of 2005, but lower than at any time since the end of 2002. The vacancy rate for all rental properties (of which 30% are single-family units) was 9.9% in the third quarter of 2005, up slightly from 9.8% in the previous quarter but down from 10.1%— the rate for the first quarter of 2005 as well as the rate for one year earlier (Figure 1).
Regionally, the highest vacancy rate was located in the South, at 11.9% in the third quarter, which was down from 12.3% one year earlier. The West reported a vacancy rate of 7.3% in the third quarter of this year, down from 7.7% one year earlier. Vacancies in the Northeast came in at 6.0% for the period July-September 2005, 1.3 percentage points below the third quarter of 2004 and the Midwest weighed in with a 13.4% rate, which was slightly more than one percentage point higher than it was a year earlier.
Absorption rates for new, unfurnished rental apartments1 rose by six percentage points to 68% for units completed in the third quarter of 2004. This is an improvement from the 62% absorption rate recorded one year earlier, and is the highest rate recorded since the third quarter of 2001 (Figure 2).
Regionally, the highest absorption rate was in the Northeast, at 77%, followed by an absorption rate of 72% in the West, 67% in the South, and 63% in the Midwest. It’s important to note that these rates are almost all higher than they were in the previous quarter, with the lone exception being the Midwest, where absorption rates nonetheless increased by one full percentage point.
The formation of new households is a key part of the overall demand for multifamily housing, and household formation has risen significantly since the middle of 2004 (Figure 3).
There were approximately 105.2 million households in the U.S. in the third quarter of 2002, and just 105.5 million one year later, an increase of just 300,000 households, or less than half-of-one percent. However, by the third quarter of 2004, the number had risen to 106.9 million, up 1.4 million (or 1.3%) from a year earlier. And for the most recently completed quarter (Q3), the number of households stood at 108.4 million, an increase of 1.5 million, or almost 1.5%.
Still more significant is that year-over-year household growth ending in the first two quarters of 2005 was 1.9 million and 1.8 million respectively. Those rates were slightly faster than the rate in the just-completed third quarter of this year. At least part of the reason for increased household growth is the continued overall expansion in the U.S. economy and the weak job market earlier in the decade that somewhat depressed household growth rates.
This robust growth in households helps explain the first sustained increase in renter households since the first quarter of 1995—more than 10 years ago. At that time, the number of such households was about 35.5 million, and it now stands at 33.8 million, its highest level since the first quarter of 2003, up from a low of 33.2 million during the first quarter of 2004.
Asking Rents
Median asking rents3 were $956 for rental units completed during the third quarter of 2005. While that is down from the record asking price of $1,025 during the second quarter of 2005, it is the third highest level ever recorded and it suggests general improvement in this market. Regionally, the Northeast and West continue to have the highest rents at over $1,050 in each case. They are both followed by the South, with an asking rent of $930, and the Midwest, with an asking rent of $817. While rents are clearly higher on both coasts, asking rents in both the Midwest and the South are at their second-highest levels ever.
Perhaps not surprisingly, asking rents for existing apartments also have been generally improving, and are near all time highs. For all existing units, asking rents were $614 during the third quarter of 2005, which is $11 higher than in the second quarter, and six dollars higher than in the first quarter—and just five dollars less than they were a year ago (Figure 4).
During the third quarter, the West continued to have the highest rent at $759, followed closely by the Northeast at $742. In the South, asking rent in the third quarter was $579 while in the Midwest it was $536.
Because asking rent data are volatile from quarter to quarter and can change directions quickly, we have constructed a four-quarter moving average, and calculated year-over-year changes based on those moving averages. The data show that year-over-year growth in rents has increased steadily since late 2003. From a third quarter 2003 low of 1.6%, the rate of increase in rents has risen every quarter, and stood at 4.3 % by the third quarter of last year.
Some of the increase may be attributed to changes in the characteristics of the multifamily rental units being produced. New units completed in 2004 were slightly larger than their 2003 counterparts. Median square footage rose from 1,092 square feet in 2003 to 1,105 in 2004, breaking the previous record of 1,104 square feet set in 2001. However, the share of new units completed in 2004 with two or more bedrooms fell by two percentage points, to 63%, and the share with two or more bathrooms also declined—albeit slightly—from 50% to 49%.
The Condo Market
While absorption rates for new condominiums and cooperatives3 have consistently been higher than rates for rental units since 1999, this relationship abruptly changed during the third quarter of 2004. Significantly, it did not change for just one area or region, but rather across the board. Nationally, condominium absorption rates declined from percentages in the mid-to-high 70s of 2003 and early 2004, to 66% in the third quarter of 2004. The highest absorption rate reported was 74% in the West, followed closely by the Northeast at 72%. The South was next at 65% and the Midwest reported an absorption rate of just 56% during the third quarter of 2004. Part of the reason for the lower absorption rates for condominium units may be due to the rise in mortgage rates.
Condominium production is up dramatically over the pat several years. There were 71,000 multifamily condos/coops started in 2001 and 2002, 87,000 in 2003, and 120,000 in 2004.4 The 35,000 condos begun in the second quarter of 2005 represented a 25% increase over the 28,000 started one year earlier.
Sales of existing condominiums and cooperatives, meanwhile, have been relatively strong. For all of 2004, 820,000 existing condos/coops were sold—a 12% improvement over 2003, which was itself up about 10% from the previous year. Sales of existing condos rose by between 10% and 16% in 2004 across the four Census regions. The largest gain of 16% was recorded in the Northeast, which accounted for 36% of all previously-owned condo sales last year.
In September of 2005, existing condos sold at a seasonally adjusted annual rate of 898,000, a 7% decline from June 2005 and a 5% rise from March 2005. Further evidence of strong demand for condos is their price appreciation. Median condo resale prices surged by 16% and 14% in 2003 and 2004, respectively, to levels of $165,400 and $193,600. Prices have continued to climb during 2005, and in August 2005 condo prices reached an all-time high of $223,900—a gain of nearly 16% from 2004.
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1Defined as how quickly privately financed, nonsubsidized, unfurnished units in buildings with five or more units are rented after completion.
2Source: U.S. Census Bureau, Survey of Market Absorption: http://www.census.gov/hhes/www/soma.html
3Defined as how quickly privately financed, nonsubsidized, unfurnished units in buildings with five or more units are sold after completion.
4 All condominium price and quantity information come from National Association of Realtors monthly surveys.
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