US apartment vacancy rate set to remain high in 2010

THE US apartment vacancy rate is expected to remain high in 2010 and rent growth is not seen to resume until 2011, according to a forecast by CBRE Econometric Advisors.

CBRE-EA, the market forecasting arm of real estate services company CB Richard Ellis, expects the US apartment vacancy rate to fall to 7 per cent in 2010, down from 7.3 per cent in the third quarter and 7.4 per cent in the second quarter 2009.

‘Overall, the US apartment market remains in uncharted waters with vacancies at high levels historically, amid continued job losses and a glut of housing for rent and for sale,’ Gleb Nechayev, CBRE-EA senior economist, said. ‘While the economic outlook does call for job growth to resume next year, vacancy rates will remain at historically elevated levels in most markets.’

The long-term vacancy rate for professionally managed US apartments has been about 5 per cent.

‘We’re a long way from that. It will be at least a couple of years before we move closely to a more normal level,’ Mr Nechayev said.

The slump in demand has severely damaged the sector, which until last month had the highest delinquency rate among US property types. Apartment loan delinquencies rose to 7.4 per cent in November, second only to hotels, which reached 7.8 per cent, according to ratings agency Moody’s Investors Services.

Apartments and hotels suffer downturns first, because of their short-term leases, but traditionally lead a rebound when an economy improves.

A glut of single-family homes and condominiums on the market has been a double-edged sword for apartment landlords, Mr Nechayev said.

Lower home ownership and the reduced demand for houses has forced people to become renters, he noted.

New households formed from immigration, divorce and graduation has helped counter the damaging effect from job losses.

‘Without the growth in overall rental demand, the effect of job losses on apartments would be much more severe than it has been so far,’ Mr Nechayev pointed out.

But the housing supply will continue to compete with and mitigate demand for apartments, which actually has risen over the past two quarters, he added.

CBRE-EA forecasts effective rents will drop to US$1,147 in 2010, down 0.8 per cent from the third quarter 2009.

Markets such as Austin, Baltimore, Boston, Chicago, Denver, Los Angeles, Seattle, San Diego, and Washington DC have reported more occupied than vacant apartments. Landlords in those cities offered rent concessions to lure tenants or keep existing ones, Mr Nechayev said.

CBRE-EA does not expect rents nationally to start growing in earnest until the second half of 2011. The average US apartment rent has been falling for the past year, down to US$1,156 in the third quarter.

‘We still expect some weakness in rents and occupancy next year,’ Mr Nechayev said. ‘All in all, 2010 should be a somewhat better year than 2009.’

Source : Business Times – 12 Dec 2009