Reis Sees Historic Tightening in the First Quarter

By Les Shaver

Apartment analysts expected fundamentals in the first quarter of 2011 to be strong. But New York-based research firm Reis says it was even better than expected, particularly in apartment absorption rates.

“The fact that the absorption was so strong was surprising to us,” says Ryan Severino, an economist at Reis. “It was the largest on record since we started monitoring quarterly data in 1999.”

Nationally, the vacancy rate dropped 6.6 percent in the fourth quarter of 2010 to 6.2 percent in the first quarter of 2011. “You normally get that seasonal weakness in the first quarter, especially in the Northeast because the weather is so bad,” Severino says. “We weren’t really sure what we were going to see. The fact that, despite all of that, the numbers were positive, we think is a pretty telling indicator.”

Rents also continued to move up in the first quarter, with asking rents moving up 0.4 percent and effective rents rising 0.5 percent. Overall, rents grew in 75 of the 82 markets that Reis tracks. In the more supply-constrained markets, Severino expects rent increases to intensify. “Because supply is so constrained, landlords are feeling more comfortable about pushing rent increases,” Severino says. “Once we get to that point, that’s where the opportunity presents itself for super normal rent growth, which is rent growth in excess of inflation. We’re not quite there yet. Landlords in aggregate on a national basis don’t feel confident to push rents to that extent yet.”

What's driving the shrinking vacancy rates? Young renters entering the market, according to Severino. “This is a pretty strong recovery,” he says. “You do have people moving out of their parents' basement who didn’t want to be there and people who partnered up with roommates who are now moving.”

A struggling for-sale market is also helping apartment owners. “You are probably getting people who would be considered relatively good first-time home buyers, who are putting that decision off because they’re transient, they don’t have enough money for the down payment, or they haven’t been in their job that long and they’re not feeling that secure about it,” Severino says.

Lack of supply also played a strong role in the recovering data. Only 6,000 units came online in the first quarter. “That’s the lowest figure since we started publishing,” Severino says. “There’s not a lot coming online.”

But ultimately, Severino thinks supply will catch up to demand, though there will be a lag time. “If the market stays strong, ultimately you will get people building again,” he says. “That’s the kind of thing that could slow rent growth or keep vacancy declines from plummeting in manner we’ve seen in last 15 months.”

Five Markets with the Largest Rental Increases in the Past 12 Months