Apartment owners across the country are seeing more empty units than they might have expected. In spite of limited addition to the national inventory, the vacancy rate for apartments in 2006 rose by 20 basis points to end the year at 5.9 percent, up from 5.5 percent in the third quarter and 5.7 percent a year earlier, according to Reis, a New York-based research firm.
“The fourth quarter is generally slower than the second or third, so we expected slightly weaker results—but the 40-basis-point rise in vacancy at the national level was larger than we expected,” says Sam Chandan, Reis' chief economist.
A number of factors spurred this jump, including the increased supply from failed condominium projects turned rental; a continued demand, though slower than 2005, for single-family homes and condos; rising rents (asking rents in the fourth quarter of 2006 rose by .8 percent to $983, marking the 19th consecutive quarter of gains at the national level, according to Reis); and, of course, seasonal factors (fewer people move at the end of the year).
Ric Campo, CEO and chairman of the board of Camden Property Trust, saw increased vacancies in his national portfolio at the end of last year, but says that isn't necessarily a negative. “I would much rather have lower occupancy and higher revenue than higher occupancy and lower revenue,” he says.
Last year, Camden and other firms voraciously raised rents, and higher vacancies are a natural effect of higher rents, Campo explains. “If somebody is at 99 percent occupancy, that sounds good, but that means they are not pushing their rents [hard enough].”
Dave Woodward, managing partner and CEO of Laramar Communities, hasn't experienced a substantial rise in vacancies at his company's properties, but he has noticed softening in Florida markets due to the condo backlash. “We have had to offer some specials in some cases—it's just becoming a little more challenging,” says Woodward. “And I think there's more of that coming. There are more failed condo deals that have yet to hit.”
Despite such challenges, apartment experts are predicting a healthy 2007. While the vacancy rate is projected to rise to 6 percent by the end of this year, asking and effective rents are projected to rise by 3.5 percent and 3.7 percent respectively, according to Reis. “Will '07 be as strong as '06? That is hard to say,” says Campo. “'06 was a banner year for most companies, and I think '07 is going to be a good year. Whether it's a banner year will really depend on what happens with job growth through the year.”