The new construction pipeline may have finally started to take its toll.
For the first time since the fourth quarter of 2009, the national vacancy rate actually jumped—moving up 10 basis points to 4.2 percent, according to New York-based commercial real estate research firm Reis.
“We anticipated that vacancy would begin rising in 2014 due to the significant amount of new construction projected to be completed relative to demand,” Reis said in the report. “The national vacancy rate now stands 380 basis points below the cyclical peak of eight percent observed right after the recession concluded in late 2009. Nonetheless, 4.2 percent is still an incredibly tight market environment.”
Still, Reis thinks the apartment market may have passed an important threshold in the third quarter.
“Make no mistake—this is the inflection point in the market that we have been anticipating for 2014,” Reis says in the report. “It will likely be next decade before we see a declining national vacancy rate in the United States.”
The reason for the vacancy increase was simply supply and demand. In the third quarter, new construction finally overtook demand. As 46,055 units opened, 37,233 units were absorbed. The 46,055 units delivered were more than was delivered in all of 2011 and just behind the fourth quarter of 2013's 47,950 units, which was a post-recession high.
While there was a 8,822-unit difference between deliveries and absorption, net absorption still tracked ahead of last year’s pace.
“Demographics are supporting demand,” Reis said in the report. “The most common age in the United States is 22, followed closely by 23, and then 21. There are a lot of young people in the market that are predominantly renters and not homeowners. This will continue to provide significant demand, even as new supply growth accelerates.”
While it would seem to defy the laws and supply and demand (as vacancies increase, you’d expect rents to go down), this demographic provided enough demand to push asking and effective rents up 1 percent in the quarter. The 12-month change in rent growth for asking and effective rents is 3.2 percent and 3.4 percent, respectively, which is on par with last quarter.
Reis expects this trend to continue.
“The new units being delivered will come online with higher- than-average rents,” it said in the report. “This has a tendency to actually push average rents upward during tight market environments. Therefore, despite slowly rising vacancy, rents will continue to nudge higher over the next few years.”
But vacancy could move upward as well, albeit at a slow pace.
“With supply projected to continue to outpace demand for the balance of 2014 and through the forecast horizon in 2018, vacancy rates are headed upward,” Reis says. “However, the rift between new construction and net absorption should not be great, causing vacancy to increase slowly over a number of years.”