Apartment Fundamentals on the Mend

The national apartment market posted a reasonably strong first quarter performance with positive absorption totaling 8,600 units, reports Manhattan-based real estate research firm Reis, Inc. Those 8,600 units of absorption represent a positive difference of 26,000 units over the first quarter of 2004, which is stronger when you consider that demand for apartment units is typically weaker in the Winter.

“This absorption performance is impressive and represents the best first quarter since 2001,” says Lloyd Lynford, CEO of Reis, Inc. The vacancy rate in the top 64 metropolitan markets edged down by 10 basis points to 6.6% during the first quarter. Effective rents, meanwhile, rose 0.6%, up from a 0.3% increase during the fourth quarter of 2004.

Another good sign, says Lynford, is that new supply is slackening. During the first quarter, only 16,800 new units were added to the market, and that’s the lowest quarterly completion’s total since the downturn began in 2001.

Slightly more than half of the top 64 markets recorded positive absorption in the first quarter. What’s more, 50 of these markets posted rising effective rents. Standouts included Atlanta, where 1,597 units were absorbed, followed by Phoenix with 1,326 and Tampa coming in third with 948. The weakest markets were Miami, Northern Virginia and Fort Worth, which all posted roughly 900 units worth of negative absorption.

While the short-term health of the apartment market isn’t in doubt, Lynford says that “one factor on the horizon” might dilute the economic recovery––new construction. Based on Reis data projections, the number of units coming on line between 2005 and 2009 will likely exceed demand. [see chart below]

Adds Lynford: “Because of this imbalance, the vacancy rate will see only modest declines during the same period, and will not dip below 6% until 2008, though effective rent growth will begin to exceed 3% starting in 2006.”

Projected Multifamily Units Above Absorption