Buoyed by the single-family housing downturn and fewer tenant concessions, apartment fundamentals improved sharply during the third quarter. One caveat is that a handful of Sunbelt markets with an over-abundance of unsold condominium units actually saw their fundamentals weaken during the quarter.
Manhattan-based real estate consulting firm Reis Inc. reports that average asking rents increased by 1.3% during the third quarter. Effective rents also increased by 1.4% to an average of $964 per unit, the largest quarterly increases in a year. Vacancy also fell by 20 basis points to 5.6% at the end of September.
“The last two quarters’ occupancy gains bring the national vacancy rate to within 10 basis points of last year’s cyclical low of 5.5%,” says Dr. Sam Chandan, chief economist at Reis.
New supply was also offset by heavy leasing demand. According to Chandan, 24,000 new apartment units were completed during the third quarter, up from 15,900 in the second quarter. But net absorption of roughly 43,000 units easily outpaced the flow of new units onto the market.
Several large coastal markets posted the steepest quarterly rent growth. In New York City, where 63% of all residents rent their homes, effective rents popped by 3.6%. San Francisco and San Jose posted effective rent gains of 3.4% and 3.3% respectively. In Seattle, which is another West Coast stronghold for apartment demand, effective rents increased by 2% during the quarter.
“Absent recent years’ sense of urgency to purchase a home, uncertainty with regard to the housing market and the last two months’ spike in jumbo mortgage rates are supporting strong demand for rental units in the most expensive housing markets,” says Dr. Chandan.
Reis data bears out that observation. Twelve-month effective rent growth through the end of September was strongest in San Jose, New York, San Francisco, Seattle and Washington, D.C. All of these markets saw housing values rise dramatically during the last housing boom. The median value of homes in New York City and San Francisco were the highest in the nation at the end of 2006, reports the National Association of Realtors.
But the housing downturn isn’t having a uniformly positive effect on all markets. Reis reports that the Southern Florida, Phoenix and Las Vegas apartment markets actually weakened during the previous quarter as a so-called “shadow inventory” of unsold condo units vied for tenants. Faced with a glut of for-sale units, many condo developers and investors have resorted to renting out their units.
In terms of effective rent growth, this explains why six of the nine weakest apartment markets at the end of last month were located in Florida. Even more distressing for Sunshine State apartment landlords: Four major markets posted increasing vacancy rates during the quarter —Palm Beach, Jacksonville, Miami, and Orlando.
Highlights from the third quarter apartment market:
• The Bethany Group bought a 12-property apartment portfolio in Phoenix for roughly $82,500 per unit. According to PricewaterhouseCoopers, that stands as the most expensive apartment portfolio sale in Arizona history.
• New Jersey-based Kushner Cos. sold an 86-property apartment portfolio for roughly $2 billion, making it one of the largest New Jersey apartment sales in history.
• In early October, Sawyer Realty Holdings began marketing a 20-property, 7,000-unit portfolio of apartment units in the Washington, D.C-Baltimore corridor.
• Another recent offering: Trillium Residential put a 2,434-unit apartment portfolio in Phoenix on the market a few weeks ago. The six-property portfolio is valued at nearly $450 million.