A Few Negatives Creep into Strong Apartment Rental Market
By Tim Ahern | September 06, 2016
Overall conditions in the nation’s multifamily rental market remain strong. But the apartment sector is beginning to display some signs of weakness, according to Fannie Mae’s Multifamily Market Commentary for August.
“You might not realize that demand is starting to slow down a bit,” says Kim Betancourt, director of economics for Fannie Mae’s Multifamily Economics and Market Research Group (MRG).
“At first glance, it might not seem that way – with the estimated vacancy rate staying low and rent growth still outpacing inflation. But it’s all a matter of comparing where we were a year ago with where we are today,” Betancourt says.
Estimated effective rents climbed by 1.5 percent during the first half of 2016, according to preliminary third-party data. Rents have been rising for 25 consecutive quarters.
“But there has been a significant change in the estimated vacancy rate and net absorptions,” she says.
The national estimated vacancy rate stood at 5.0 percent at the end of June. That was relatively low by historical standards, but it was clearly up from the same time a year earlier, when the vacancy rate was 4.75 percent.
Fannie Mae’s August commentary also reports that net absorptions declined in this year’s first six months. “They slowed down quite a bit,” says Betancourt. (Net absorptions indicate the net change in occupied rental units.)
Reis, which provides data about commercial real estate, estimated that there were 69,000 net absorptions during the first half of 2016. While the number was positive, it was down from an estimated 97,000 units for the same period of 2015.
The Fannie Mae commentary says the decrease in net absorptions indicates that demand for multifamily rentals has slowed. The report also notes that the roughly more than 380,000 new multifamily rental units Dodge Data & Analytics expects to come online this year would “far exceed” expected demand.
Vacancies Up in Some Markets, Down in Others
“Demand is slowing down in some places, and it is still alive and well in others,” says Betancourt.
Preliminary data from CBRE Econometric Advisors show that the number of metropolitan areas with rising vacancy rates is growing. The real estate research firm estimated that the vacancy rate fell in 33 out of 66 metros in this year’s second quarter, while 28 metros saw vacancies rise and five metros remained the same.
Metros with the biggest declines in year-over-year vacancy rates in the second quarter, according to CBRE Econometric Advisors, included Norfolk, VA; Tucson, AZ; San Diego; Memphis, TN; Providence, RI; Richmond, VA; Birmingham, AL; and Louisville, KY.
Metros with vacancy rates below 4.0 percent included Detroit; Oakland, CA; New York City; Newark, NJ; Long Island, NY; and Providence, which had the overall lowest rate of 2.7 percent.
Among metros with the most significant second-quarter increases in vacancies were Denver; Hartford, CT; Honolulu; Oklahoma City; Pittsburgh; and San Jose, CA. All saw year-over-year increases of 100 basis points or higher.
Positive Market Fundamentals
“We expect fundamentals to remain positive for the balance of 2016,” says Betancourt. “But the slowdown at the national level is likely to push the overall vacancy rate higher even as rent growth stays positive. And we do not expect the vacancy rate to rise all that much – to only about 5.5 percent by year end.”
The slowdown in the multifamily sector shouldn’t last longer than a couple of years, the commentary notes.
On a national level, MRG expects employment growth, solid demographic trends, and low homeownership rates to keep rent growth positive – at about 3.0 percent this year.
Tim Ahern is a writer in Fannie Mae’s Corporate Communications department.
Opinions, analyses, estimates, forecasts, and other views of Fannie Mae’s Multifamily Economics and Market Research Group (MRG) included in these materials should not be construed as indicating Fannie Mae’s business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the MRG bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the MRG represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.