Nationwide Apartment Supply Wave Starting to Impact Fundamentals

From an item published by CoStar Group:

New apartment completions and construction starts continue to trend upward, and the new supply of units is beginning to show up in rising vacancy rates in a number of high-growth U.S. markets…

Vacancy rates in the 54 largest markets tracked by CoStar Group remain at a 10-year low. However, the trend has clearly begun to reverse course. The national vacancy rate has risen roughly 30 basis points over the last three quarters to about 5.5% as supply has overtaken demand, and CoStar is forecasting another 50-basis-point rise in vacancies through the second half of 2014.

Translation – it isn’t happening in secondary or tertiary markets like Greensboro-High Point or Winston-Salem. It’s also restricted to high-end properties:

And while new construction for multifamily housing has picked up in recent months, analysts have also noted that demand for rental housing continues to show strength. As a result, the vacancy uptick has been restricted to Four- and Five-Star properties in markets such as Boston, Austin, Minneapolis and Washington, D.C. Vacancies in Three Star properties haven’t yet seen much movement.

“While the impact of new product will certainly trickle down to the Class B space, it hasn’t happened yet,” Yuen said.

Vacancies Fell, Rents Rose Over the Summer

From an article in the Oct 1 Wall Street Journal:

The average monthly rent in the third quarter was $1,073, up 1% from the prior quarter, the largest quarterly gain in a year, according to a report to be released Tuesday by Reis Inc., a real-estate research firm. Compared with the third quarter a year ago, average monthly rent was up 3%. None of the 79 markets tracked by Reis saw rents fall.

The rental increases were stronger than industry watchers expected and represent a turnaround from the past several quarters when it appeared that rent growth was slowing, reflecting falling demand for apartments as more families decided to buy homes. But as mortgage rates jumped over the summer, following big increases in home prices, the rising cost of homeownership has priced many families out of the housing market.

However, the party won’t last forever:

But there’s another reason why some expect the rent increases to slow: a flood of new supply on the horizon. Some 170,000 new units could hit the country’s largest 54 metropolitan markets this year—about 120,000 have already been finished—followed by 190,000 in 2014 and 300,000 more units in 2015-16, according to Luis Mejia, director of multifamily research for CoStar Group, a real-estate data firm. “We see a lot of supply coming, no doubt about it,” he said. “But, younger people are renting longer than previous generations.…There is the notion that homeownership will come, but will come later in life, not as quickly as it was before the recession.”