MultiFamily Market Outlook

Weakness in the single-family housing market continues to act as a drag on demand for multifamily units for sale. Nonetheless, absorption rates for newly completed condos were up during the first quarter of 2009, as were asking prices. Meanwhile, multifamily rental properties are being affected by several forces. Demand is up due to foreclosures and prospective buyers' fear of purchasing a single-family house or a multifamily condo unit. At the same time, the supply of multifamily rental units is up as new product comes on the market and as older, unsold properties are offered as rentals.

This happens when some condo complexes are converted from condo to rental, and when some condo owners who are unable to sell their property seek income by renting their property to reduce their losses, or even make a small profit. The net result is that asking rents for new properties were down in the fourth quarter of 2008, which may have helped boost absorption rates for new apartments. However, asking rents for existing apartments were up in the first quarter of 2009.

Vacancy Rates Stay High

Rental vacancy rates provided a mixed bag in the first quarter of 2009. Overall rental vacancy rates, at 10.1%, were unchanged from the first quarter of 2008 as well as the end of last year.¹ Smaller structures (2 to 4 units) showed an improvement, dropping to 8.8% from 9.0% a year ago and 9.1% at the end of last year. However, rental vacancy rates for buildings with 5 or more units rose sharply to 11.5% from 11.0% in the first quarter of 2008.

The 11.5% reading matches the vacancy rate for the first and fourth quarters of 2004. That rate was last exceeded by the second quarter 2004 reading of 11.8%. The most recent peak rate was 11.9% in the fourth quarter of 2003. (Figure 1)

The regional rental vacancy rates were a mixed bag as well. Both the Northeast and Midwest improved from the previous year—6.9% and 10.1%, respectively—compared to 7.3% and 11.8% in the first quarter of 2008. Meanwhile, the rates for the South and West rose to 12.9% and 8.6%, respectively, from 12.7% and 7.0% a year ago. View Table 1 here.

The national absorption rate for new, unfurnished rental apartments² rose to 55% (seasonally adjusted) for units completed in the third quarter of 2008. This is a rebound from the 52% reading for apartments completed in the second quarter of 2008, which matched the lowest absorption rate since the Census Bureau started reporting this series in 1990, and is in line with quarterly absorption rates for buildings completed starting in third quarter 2006.

The rate has ranged from a low of 52% for units completed in third quarter 2006 (and again in first quarter 2009) to a high of 57% for units completed in fourth quarter 2007. (Figure 2)

On a non-seasonally adjusted basis, the national absorption number was 54%. The Northeast region had the highest absorption rate at 76%. The Midwest was close behind with 74%. In both cases, the rate was up significantly from the rate for units completed in third quarter 2007 (53% and 44%, respectively). The South rose marginally to 52% from 51% for completions in third quarter 2007. Finally, the West region fell to a low 41%, down significantly from 63% for third quarter 2007 completions. View Table 2 here.

Except for a blip upward in the second quarter of 2008, homeownership has been on a general decline since the third quarter of 2006 when it hit 69.0%. In the first quarter of 2009, the homeownership rate had fallen to 67.3%. That is the lowest reading since third quarter 2000, when it stood at 67.2%. A little over a decade and a half ago, the measure stood at 63.7% (first quarter 1993). The fall in the homeownership rate, of course, means that the rentership rate has risen over this same period. This trend is likely to continue for the near term—a positive for the outlook for rental properties, especially given the slowdown in multifamily housing starts. (Figure 3).

After falling in the fourth quarter of 2008, national median asking rents for existing vacant apartments rebounded in the first quarter of 2009, rising from $704 to $723. This is an increase from the previous peak rent of $719 in third quarter 2008. That is up 6.5% from first quarter 2008’s median asking rent of $679. First quarter 2009 rents rose marginally in the Northeast from $803 to $805, and dramatically in the South from $680 to $709. Meanwhile, they fell in the Midwest and West from $594 and $850 to $586 and $844, respectively. Nonetheless, rents in the Midwest were up 3.2% from first quarter 2008, and up 2.3% in the West. View Table 3 here.

Median Asking Prices for New Apartments Were Down in the Fourth Quarter

Median asking rents for new apartments fell in the fourth quarter of 2008 (for apartments three months after completion in the third quarter) to $1,003, down from $1,133 in the third quarter. Median asking rents for existing apartments also declined, though not as much in absolute or percentage terms, to $704 in the fourth quarter of 2008 from $719 in the third quarter. Median asking rents for new apartments were down for at least three of the four regions of the country (the data reported for the West are not precise enough to determine if rents fell there) in the fourth quarter compared to the previous quarter. On a year-over-year basis, asking rents were down nationally and for three of the four regions. Median asking rents were up for the West compared to fourth quarter 2007. View Table 4 here.

Nationally, absorption of new condominiums and cooperatives³ rose in the third quarter of 2008 from 49% to 55%. That is the first increase since the absorption rate hit 64% in the second quarter of 2007. Nonetheless, the absorption rate is still down from the 63% recorded in the third quarter of 2007. The absorption rate had run as high as 79% as recently as the second and third quarters of 2005. Clearly the low absorption rate is a reflection of the weak demand for housing and tighter credit conditions.

The absorption rate rose strongly in the South from 53%t to 73%. The Midwest also saw a strong increase from 17% to 33%. However, looking at the absorption rate over the past year for the Midwest, it looks more like the second quarter figure was an aberration and that the rate has returned to its current normal rate. On a year-over-year basis, the Midwest is largely unchanged from the 34% absorption rate in the third quarter of 2007. We will have to wait to see if the readings for the Northeast and West are aberrations or not. The absorption rate for the Northeast fell to 40% from 53%, and also is down from 60% in third quarter 2007. The West fell to 38% from 53%, and is down from 69% from a year ago. (Table 5)

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 unless otherwise noted. Source: U.S. Census Bureau, Survey of Market Absorption: http://www.census.gov/hhes/www/soma.html

The asking prices for new condos continue to increase. Nationally, the median asking price in fourth quarter 2008 for condos completed in the previous three months rose to $382,500 from $366,200 third quarter, a 4.5% increase. The median asking price is up 9.3% from fourth quarter 2007’s asking price of $350,000. Median asking prices in the fourth quarter rose slightly in the Midwest to $248,500 from third quarter’s $248,100. Nevertheless, that was down 8.3% from $270,900 in fourth quarter 2007. The fourth quarter median asking price for the South reported a sharp increase of 17% to $359,100 from $306,700 in the third quarter. However, that was up a more modest 2.6% from the $350,000 reported in the fourth quarter 2007. View Table 6 here.

Sales of existing condominiums⁴, after bouncing along a bottom, appear to be showing some improvement. The March 2008 figure of 470,000 (at a seasonally adjusted, annual rate) is roughly in line with the previous four months’ average of 475,000 sales. Over that four month period, sales of existing condos ranged from January’s low of 440,000 sales to December’s 490,000. Sales over this period represent the lowest they have been this number was first reported in 1999. However, April’s sales were up to 500,000, the highest level since October 2008’s 547,000 and just a little below the fourth quarter 2008 average of 506,000. At the end of April 2009, the inventory of existing condos for sale jumped to 628,000. That translated into a 15.1 months’ supply of exiting condos for sale based on April 2009’s sales rate. The increase in inventory may reflect a more optimistic view by sellers who had been waiting to list their units for sale until they felt there was an improvement in the market. (Figure 4)

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1}Since these data are not seasonally adjusted, care should be used when comparing any quarter other than the same quarter from a different year.
²Defined as how what percentage of privately financed, nonsubsidized, unfurnished units in buildings with five or more units are rented within three months of completion.
³Defined as what percentage of privately financed, nonsubsidized, unfurnished units in buildings with five or more units are sold within three months of completion.
⁴Data on sales of existing condominiums comes from National Association of Realtors monthly surveys.

MultiFamily Market Outlook - 05/29/2009 (Plain Text Version)

Quarterly Multifamily Update: Vacancies High, but Absorption Rising