The weak housing market continued to support healthy apartment fundamentals during the fourth quarter of 2007, even as deliveries amounted to the largest addition of new stock since the fourth quarter of 2004. Despite new units coming online, growing demand off set that new supply, keeping vacancy rates stable, according to Marcus and Millichap's quarterly “Performance Monitor.”
Despite increased construction activity, vacancy rates remained stable at 5.6 percent in the fourth quarter. Effective rents rose by 1.1 percent in the fourth quarter after increasing 1.3 percent during the previous quarter. With effective rent gains pushing higher, the revenue index rose just short of the last cyclical peak of the market. Revenue gains will likely be more modest going forward as a result of slowing economic conditions amid added rental competition.
In fact, apartment completions totaled nearly 23,000 units in the fourth quarter of 2007, up from the 20,500 units delivered during the previous quarter. flat's the biggest single quarterly addition since year-end 2004, and it accounted for approximately 0.3 percent of rental inventory. Vacant for-sale home inventory also increased. Over the past year, an additional 1 million vacant homes entered the for-sale market, a trend likely to persist in 2008, keeping single-family housing prices soft and potentially adding to the shadow market inventory.
Multifamily permits and starts show mixed results. Issued permits for apartment projects decreased 2.4 percent in the fourth quarter to 83,000 units. Starts for rental units jumped 25 percent over the previous quarter and 27.7 percent from the same period last year. Both the shadow market and economic uncertainty could hinder future apartment development, and as lending guidelines remain stringent and the housing market stays soft, for-sale construction should continue to ease as well.