For months now, apartment executives and industry watchers have lamented what they're seeing in the marketplace?laid-off workers moving out to find cheaper places to reside and new renters bargaining for more concessions. But only now, as data from the fourth quarter trickles in can we fully understand the carnage that closed out 2008.

The U.S. Census Bureau's vacancy rate for all rental apartments reported that vacancies in buildings with five or more units rose to 10.8 percent?the highest mark since 2004. M/PF Yieldstar, a Carrollton, Texas-based firm that provides multifamily market analyses, measures the vacancy rate at investment-grade apartments. That number hit 7.8 percent in the fourth quarter?the second-highest level since 1993.

"The really ugly performance seen for the end of 2008 was in line with what our models predicted in the worst-case scenario," says Greg Willett, vice president of research and analysis for M/PF Yieldstar. "But you don't usually expect that everything that can go wrong actually will."

With massive slowing in places such as Atlanta (which is now in worse shape than any market in Florida), Charlotte, N.C., and Austin, Texas, the South's vacancy rate rose to a whopping 8.5 percent. The Midwest fell just behind with an 8 percent vacancy rate, while the West had a 7.3 percent rate, and the Northeast returned a 6.2 percent vacancy rate at the end of the quarter.

"It was a little surprising to see just how quickly the Pacific Northwest markets, which had been in such great shape, lost momentum," Willett says. "And the complete collapse of the performance in Los Angeles was stunning. That metro saw occupancy levels fall nearly five percentage points during 2008, translating to huge net move-outs for a market that contains more than 1 million units."

Willet expects vacancies to reach their highest points in late 2009 or early 2010. With vacancies rising, it's little wonder that rents also took a hit. In institutional-grade units, M/PF Yieldstar reported that rents dropped by 0.3 percent, which was the first decline since the third quarter of 2003. Without adjusting for inflation, rents increased in the Midwest (1.1 percent) and South (0.2 percent) and fell in the West (-1.7 percent) and Northeast (-0.1 percent). With inflation-related adjustments, rents fell in every region.

"Rents are going to be cut significantly during 2009," Willett says. "We're expecting rates to come down at least 3 percent for the nation as a whole, which would be the most severe annual slide ever seen."

Apartment owners are seeing this as well. "We would trend almost every market down a little bit to a lot this year," says Greg Mutz, CEO of AMLI Residential, an apartment owner with properties in the Midwest, Texas, California, the Northeast, Florida, and Atlanta.

"If you look at different analyst reports on everybody, they are giving guidance with rents going down," Mutz adds.

Falling Off

Multifamily metrics are suffering. In the fourth quarter of 2008, vacancies crept upwards, while same-store rents nationwide declined for the first time since the third quarter of 2003.

4Q 2008

3Q 2008

4Q 2007

U.S. vacancy levels




U.S. "same store" rent change




Source: M/PF Yieldstar