Marcus & Millichap Research Services

During the first three months of 2008, developers brought the fewest number of units to market since the second quarter of 2007, resulting in approximately 37 percent fewer completions than in last year's fourth quarter, according to Marcus & Millichap's “Performance Monitor.” Continued weakness in the job market and competition from shadow rental stock caused gains in operating income to slow in the first quarter.

Asking rents increased 0.8 percent during the first quarter, compared to 0.9 percent growth achieved during the same time frame last year. Annually, asking rents rose 4.6 percent. Effective rents increased 0.7 percent last quarter and 4.5 percent over the past 12 months. The growing use of concessions, mostly in Sun Belt states flooded with shadow stock, is cooling effective rent gains, a trend that is expected to persist throughout the rest of 2008.

Over the past year, stable vacancy and modest effective rent growth provided for a 4.4 percent rise in apartment operating revenues. During the first quarter, slower effective rent growth due to a bump in concessions and somewhat higher vacancy levels combined to push quarterly revenue up just 0.3 percent. Ongoing weakness in the housing market continues to add to the national supply of vacant homes. Over the past 12 months, vacant inventory rose 6 percent, or by an additional 1 million homes. As demand for for-sale housing remains tepid due to tighter lending standards and an uncertain economic climate, forecasts point to additional competition for apartment owners as more single-family homes convert to rentals.

Multifamily permits and starts show similar trends. Issued permits for apartment projects fell 17 percent in the first quarter to 63,000 units. Starts for multifamily rentals decreased by 21 percent in the first quarter, to 62,000 units. During the same time frame in 2007, 56,000 units were started. Given the continued weakness in the housing market, for-sale starts should remain subdued through the next 18 months as well.

Source: Marcus & Millichap Research Services