A slew of recent market reports are beginning to shine a light on what many apartment operators are already feeling at the site level: improved fundamentals in both occupancy and effective rents. One reason why: net apartment absorption—the amount of units leased after deducting the amount of supply—jumped by more than 46,000 units in the second quarter. That’s the highest increase in a decade, according to a New York-based investment firm Barclays Capital analysis of multifamily market data from New York City-based real estate research firm REIS. According to the report, the national vacancy rate has decreased 200 basis points to 7.8 percent, and improvements are widespread, with occupancy increases in 67 of 92 markets, and net absorption improvements in 71 of 82 metro areas tracked by REIS.
Industry sentiment on the condition of quarterly apartment metrics released this week by the Washington, D.C.-based National Multi Housing Council (NMHC) likewise show multifamily market buoyancy despite the continued overshadowing specter of a sluggish economic recovery. “The strong responses in each of our last two surveys indicate widespread improvement over the past six months,” noted NMHC Chief Economist Mark Obrinsky in the Quarterly Survey of Market Conditions. “Demand for apartment residences has substantially increased thanks to modest improvements in the jobs market and the continuing decline in homeownership rates.”
According to Carrollton, Texas-based M/PF Research president Greg Willett, recovery in the apartment sector is coming from a variety of different sources, but nonetheless is equating to comparatively more aggressive rent pricing and the consideration of development options among operators. “Our numbers are showing really impressive demand so far this year, and it’s not just in a handful of areas; it’s pretty much everywhere,” Willett says. “But when you look at the job numbers out there, while certainly for the first half of the year they were meaningfully improved, they still don’t support all of the demand that you are seeing, so it has to be coming from other sources.”
Willett says an ongoing anecdotal survey of operators by M/PF Research reveals slight demand increases from incremental job growth, the decline of the doubling-down phenomenon as renters elect to ditch roommates in favor of one-bedroom units; portions of the Gen Y demographic moving out of their parents' residences; single-family shadow renters returning to the apartment market; and even those individuals that have sold their homes opting to rent in what is otherwise an uncertain economy.
Even as absorption quickens its pace, the Barclays Capital report notes that the majority of occupancy and corresponding rent improvements are being felt at existing properties as compared to the few new lease-ups coming online. According to the report, 70 percent of second-quarter net absorption came from existing buildings, while the percentage of units rented in newly constructed buildings is hovering at about 50 percent, down from the 65 percent highs enjoyed by operators in 2005 and 2006.
Regardless, multifamily developers seem to be returning to the construction market as improvements in rent fundamentals and unit pricing at existing properties begin to pencil out building pro-formas. “In general, most operators are starting to raise rents, certainly not aggressively, but they are starting to push them up a little bit,” Willett says. “We are also starting to see a handful of starts—you can’t say development is back, but we’ve gone from extremely minimal development primarily focused on affordable and senior housing to a handful of traditional, market-rate product in sizeable communities starting. One development in a metro doesn’t change the picture, but it’s still more than we were seeing.”