Rental Vacancies Remain Low

The vacancy rate for buildings with 5 or more units stood at 10.1% for the three months ending December 2006, down from 10.4% during the third quarter of 2006, but up from 9.5% during the fourth quarter of 2005. The vacancy rate for all rental properties (of which 30% are single-family homes) stood at 9.8% in the fourth quarter of 2006, down slightly from 9.9% in the previous quarter and up from 9.6% during the fourth quarter of 2005 (Figure 1). 

Quarterly vacancy rates are not seasonally adjusted. Source: U.S. Census Bureau, Housing Vacancies and Homeownership

Regionally, the highest vacancy rate was found in the South, at 12.4% in the fourth quarter, up from 11.9% in the previous quarter and up from 11.4% recorded a year ago. The West reported a vacancy rate of 7.0% in the fourth quarter of this year, up from 6.5% in the third quarter and unchanged from 12 months ago.  Those rates reflect the fact that new multifamily construction has been most active in the South and West.

Vacancies in the Northeast came in at 6.5% for the period September-December, down from 7.7% during the June-September quarter of 2006, and down slightly from 6.7% 12 months ago. Meanwhile, the Midwest weighed in with a vacancy rate of 11.9%, down seven-tenths of a percentage point from the third quarter and down four-tenths of a percentage point from what it was a year ago.
      
National absorption rates for new, unfurnished rental apartments¹ fell from 67% in the third quarter to 59% for units completed in the fourth quarter of 2005. While this is up slightly up from the 58% absorption rate recorded in the fourth quarter of 2004, it is the third-lowest rate recorded since the start of 2003 (Figure 2).

Absorption rates are for structures with five or more housing units that are privately financed, nonsubsidized, and unfurnished. The results are presented for units completed during the indicated quarter.  The quarterly rates are not seasonally adjusted. Source: U.S. Census Bureau, Survey of Market Absorption

Regionally, the Northeast and the West both had the highest absorption rates at 65%, while the South and Midwest both reported absorption rates of 55%. Moreover, the absorption rate fell by 17 percentage points in the Northeast between the third and fourth quarters, while the rate in the South declined by 14 percentage points, with the Midwest rate declining by 11 percentage points.  In the West—the only area to experience any rise in the absorption rate—the rate rose by three percentage points.   

New Households Spur Rental Demand
       
The formation of new households is another key indicator of the overall demand for multifamily housing. And while multifamily household formation (including both rental and condo) has risen in every quarter since the start of 2004 (Figure 3), it still is 200,000 below its recent high of 34.4 million recorded during the first quarter of 2006. This trend suggests that the rate of multifamily household formation may be slowing, but is still well above the recent cyclical lows registered during 2004.  

Source: U.S. Census Bureau, Housing Vacancies and Homeownership

This general 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 34.2 million—up handsomely from 33.7 million a year ago, but down slightly from 34.2 million in the second quarter of 2006. The number of renter households now is at its fourth-highest reading since the start of fourth quarter of 2002—and up from a low of 33.1 million during the last two quarters of 2004. Newly-formed households tend to be renters rather than owners.          

Asking Rents Are Healthy, even Record-Setting

Median asking rents were $974 for rental units completed during the fourth quarter of 2005. Although that is down from the record asking price of $1,025 during the second quarter of 2004, it is the third-highest reading ever recorded, and it is $47 higher than in the previous quarter. This strongly suggests general improvement in this market. Regionally, the Northeast and the West continue to have the highest median asking rents with the median asking rent in the North at more than $1,150, and in the West at $1,088.  These two high-priced regions are followed by the South, with a median asking rent of $885, and the Midwest, at $750. Although rents are clearly highest on both coasts, median asking rent in the Midwest is near its all-time high, and the median asking rent in the South is within $81 of its highest quarterly reading ever.   

Perhaps not surprisingly, asking rents for existing apartments also have been improving, and are at or near all-time highs (Figure 4).

Quarterly asking rents for vacant units are not seasonally adjusted. Source: U.S. Census Bureau, Housing Vacancies and Homeownership

For all existing units, the median asking rent was $700 during the fourth quarter of 2006, which is $61 higher than in the previous quarter and $107 more than a year ago. Moreover, this is the highest median asking rent for existing apartments ever recorded. During the fourth quarter, the Northeast had the highest median asking rent at $825, followed closely by the West at $805. In the South the median asking rent was $632, while in the Midwest it was $574. In all areas except for the Midwest, median asking rents are at their highest levels ever.             

Because asking rent data on new apartments are volatile from quarter to quarter and can change directions rather quickly, we have constructed a four-quarter moving average and have calculated rents based on the moving averages. These data show that at present, rents are within $32 of their all-time high. While some of the increase is due to local economic conditions, some of the increase may be attributed to changes in the characteristics of the multifamily rental units being produced. New units completed in 2005 were slightly larger than their 2004 counterparts. Median square footage rose from the record level of 1,105 square feet in 2004 to 1,143 square feet in 2005, and to 1,154 square feet during the third quarter of 2006. Similarly, the share of new units completed in 2005 with 2 or more bedrooms rose by four percentage points, to 67%, and the share with two or more bathrooms also edged up, from 49% to 54%.  

The Condo Market Holds Its Own

In the third quarter of 2005, absorption rates for new condominiums and cooperatives² generally declined but once again tended to be higher than for rental units; a relationship that has held consistently since 1999, with the exception of the third quarter of 2004. Nationally, the condominium absorption rate was 68% in the fourth quarter of 2005, down from a more robust 75% in the third quarter of 2005. The highest absorption rate reported was 77% in the West, followed by the South at 71%. The Northeast was next at 61%, and the Midwest reported an absorption rate of just 49% during the second quarter of 2005. While 49% is very low, it is important to remember that quarterly absorption numbers are volatile and that the completion of just one large project can dramatically alter the results, especially for areas in which condo construction is not prevalent.  It will be interesting to see the results for the Midwest unfold over the next several quarters as condo construction and conversion activity rises in second- and third-tier markets.

Over the past several years, condominium production overall has increased dramatically. There were 71,000 multifamily condos/coops started in 2001 and 2002, 87,000 in 2003, 120,000 in 2004 and a stunning 150,000 in 2005³,  in large part because a record 51,000 condos were begun in the third quarter of 2005.  Despite anecdotal evidence to the contrary, construction activity in this sector appears to be heating up in 2006. During the first quarter of 2006 we saw 39,000 condos started, while 42,000 were started in the second quarter, and a very solid 38,000 were started in the third quarter of last year. Although condo starts have retreated slightly from the all time quarterly highs of 2005, on a year-over-year basis there appears to be little, if any, evidence of a decline so far. Given the relative weakness in condo prices and strength in rents, an important question that can’t be answered by the federal government’s statistics is: How many new projects might be converted from condos to rental units somewhere along the way--reversing  the trend most industry analysts believe was occurring a couple of years ago?

Sales of existing condominiums and cooperatives, meanwhile, have been steadily cooling from the torrid pace exhibited during the second and third quarters of 2005. For all of 2005, there were 896,000 existing condos/coops sold—a 9% improvement over 2004, which was itself up about 12% from the previous year. However, last year’s 803,000 sales of existing condos represented a decline of about 10% from 2005. Perhaps more importantly, sales fell by between 5% and 14% in 2006 across the four Census regions. The largest decline (14%) was recorded in the West, followed closely by the South (13%) while the Northeast (10%) and the Midwest (5%) suffered milder declines. The two regions with the sharpest declines collectively accounted for almost 42% of existing condo/coop sales in 2006.       

In December of 2006, existing condos sold at a seasonally adjusted annual rate of 777,000, a 12% decline from December 2005 and a 17% decline from the June 2005 peak. Further evidence of the weakening demand for condos can be seen by looking at rates of appreciation. Median condo resale prices spurted by 18%, 17%, and 14% in 2003, 2004, and 2005 respectively, bringing them to levels of $168,500, $197,100, and $223,900 for those three years. However, during 2006, median condo resale prices declined by about 1% to $221,800, and are almost 5% below the all-time high of $231,800 set in June 2005.

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 ¹ Defined as what percentage of privately financed, nonsubsidized, unfernished units in buildings with five or more units are rented wihting 90 days of completion.

² Defined as what percentage of privately financed, nonsubsidized, unfurnished units in buildings with five or more units are sold within 90 days of completion.

³ All condominium price and quantity information come from National Association of Realtors monthly surveys.   [ return to top ]