Ryan Severino is senior economist and associate director of research at Reis, based in New York City.
Ryan Severino is senior economist and associate director of research at Reis, based in New York City.

After it appeared the national apartment vacancy rate was beginning to rise late last year, the market pulled a bit of a surprise in the first quarter—the vacancy rate declined by 10 basis points from the fourth quarter of 2014, to 4.1%.

Reis Senior Economist and Director of Research Ryan Severino attributes the decrease in vacancy “to relatively weak new completions” in the first quarter.

“Although weak first quarters for completions has become a bit of a norm in recent years as seasonality has returned to the market, it is a bit surprising this year because of the large pipeline of projects slated to come online in 2015, including many new units that were supposed to be completed last year but were delayed until this year,” he said in written remarks about the data.

The 4.1% vacancy number matches the cyclical low reached in the first half of 2014.

“Despite this quarter’s decline, over the last 12 months the national vacancy rate was unchanged, indicating that the national vacancy rate has likely bottomed and should rise during the balance of 2015,” Severino said. 

Supply and Demand

The number of units absorbed in the quarter, 37,349, was the lowest since the second quarter of 2013, but Severino said it was still a respectable number. Over the last four quarters, about 160,000 new units were absorbed. 

“This is about on par with the annual level of completions from 2013 and 2014, indicating that net absorption, though down from the vertiginous levels of 2010 and 2011, has not contracted in any meaningful fashion,” Severino said. “With the economy and labor market poised to have a strong 2015, we see no reason why net absorption should decline from its current levels for at least the next two years.”

On the other side of the equation, new completions totaled 28,812 units. “The 28,812 units delivered followed the declining trend from the last few quarters and were the lowest level since the first quarter of 2013,” Severino said. “While there is typically some seasonality to apartment data in the fourth and first quarters of calendar years, the decline in construction was somewhat of a surprise given the swelled construction pipeline for 2015.”

Still, there have been a lot of new projects delivered in the past couple of years. Over the last four quarters, about 167,000 new units have been delivered, which is the highest amount in a calendar year since 1999.

“The massive amounts of new supply that are coming online over the next few years should exceed demand, which will gradually push the vacancy rate upward,” Severino says. “However, due to the large number of individuals between the ages of 20 and 29 in the U.S., demand will remain relatively stout, which will cause vacancy to rise at a somewhat measured pace.

Slowing Rent Growth

As new deliveries waned, asking and effective rents did as well. Asking and effective rents both grew by 0.6% during the first quarter. During the last four quarters, rent growth for asking and effective rents was 3.4% and 3.5%, respectively. Severino says seasonality is likely the culprit for this decline.

“Rents once again reached record-high nominal levels during the first quarter. In the short term, we expect rent growth to remain near the growth rates observed in recent periods,” Severino says. “A vacancy rate hovering near 4% is sufficiently low enough to generate supernormal rent growth in excess of inflation. However, as more and more new supply comes online and exceeds demands, the vacancy rate will gradually rise ... "

In fact, Severino points to new supply as the key risk for the apartment market going forward.

“Although it was a bit surprising that new supply continued to decline during the [first] quarter, this decline likely means that quarters with historically high levels of completions could be on the horizon in the near future,” he says. “Although demographics are favorable to apartment demand, demand will struggle and ultimately fail to keep pace with new supply growth.”

Despite this, Severino says tight supply means that it will take a number of years before the increase in vacancy stymies rent growth. While Reis expects the national vacancy rate to rise by 70 to 80 basis points this year, it expects rent growth to remain relatively strong and rise by roughly 3.5% in 2015. “Revenue growth will slow as vacancy increases, but rising rents will prevent revenues from flat lining or falling,” Severino says.