US Q3 apartment market vacancy rises

Source : Business Times - 6 Oct 2008

The US apartment vacancy rate in the third quarter rose to its highest level in more than three years, as the economy weakened and diluted the greatest source of apartment demand - job growth.

Job losses outweighed the increase in demand for apartments from former or would-be home owners, said Sam Chandan, chief economist of real estate research firm Reis.

According to Reis’ results for July-September, the US apartment vacancy rate rose 0.1 percentage points to 6.1 per cent, the highest vacancy level since the second quarter 2005, when the US housing market reached its peak and would-be renters were borrowing big to buy homes.

‘Whenever the economy is slowing, when the job market is weak, particularly for young people, it undercuts the rate of household formation and the demand for apartments,’ Mr Chandan said, adding that the third quarter is usually the strongest of the year.

However, the US economy lost 299,000 jobs in the third quarter, according to the most recent Labour Department statistics. Job loss typically impacts new entries into the labour market hard, and about 70 per cent of young adults 20 to 30 years old typically are apartment dwellers.

‘This is a real key demographic for rental demand for apartments,’ Mr Chandan said. When they can’t get a job, they usually remain in their parents’ home or double up with roommates, he said.

The average US monthly rent, including free-months rent and other perks designed to lure tenants, reached US$999 up just 0.5 per cent, its weakest increase since the second quarter 2005, Reis said in its report released on Monday.

Of the 79 metropolitan areas Reis follows, New York had the lowest vacancy rate at 2 per cent, followed by Long Island at 2.8 per cent and Central New Jersey at 2.9 per cent.

Outside of small markets, where one or two buildings can move the needle, areas hard hit by the housing collapse, such as those in Florida and several California markets, saw vacancy increase and rent growth weaken or decline.

Columbia, South Carolina, a small market, saw the greatest vacancy rise, up 1.8 percentage points to 12.2 per cent. But Jacksonville Florida, a much larger market, was second with vacancy up 0.4 percentage points to 11 per cent.

Austin, Texas saw the greatest rent growth, up 2.1 per cent to US$786 a month, Reis said.

By market, Long Island New York, a pricey market and the hard-hit housing areas of Jacksonville, Florida, and San Bernardino/Riverside, California saw monthly rent fall by 0.3 per cent. Rent also fell in Florida’s Orlando and Fort Lauderdale areas, Reis said.

The Pacific Northwest areas, home of some of the US strongest companies, such as Google, Microsoft Corp and Boeing Co, saw the strongest rent growth over the past 12 months, with Tacoma, Washington topping the list at 7.7 per cent and Seattle at 7.6 per cent.

Florida markets saw the weakest rent, with Palm Beach rent falling 0.7 per cent and Miami average rent falling by 0.1 per cent.

Over the long run, when job growth rebounds, the US apartment market will benefit from the return of traditional stricter lending standards.

‘For a lot of young people not having to make that down payment allowed them to become homeowners sooner over the last couple of years,’ Mr Chandan said.

‘With (down payments) becoming a factor again, we’ll return to a situation where we’ve been historically, where younger households tend to be renters because they have to save a while before they can afford a home.’

While some apartment landlords may suffer in the short run, apartment companies, such as AvalonBay Communities, Equity Residential, UDR and Mid-America Apartment Communities will benefit in the long run.