Despite Economic Concerns, Strong Apartment Demand Remains
23 Aug, 2011, New York
Despite sluggish economic conditions, apartment demand remains strong, according to Cushman & Wakefield's midyear U.S. Multifamily MarketBeat Report, which analyzed data from Reis and Real Capital Analytics.
Declining homeownership rates, limited access to credit for potential homebuyers and a lack of confidence in both the economy and the housing market has led to unprecedented levels of households opting to rent versus own their home. While the slowdown in the overall economy slightly slowed the pace of demand in the second quarter, overall vacancy rates for the U.S. apartment market declined to 5.9 percent at midyear, down from 6.2 percent at the end of the previous quarter, and approaching the pre-recession low of 5.7 percent.
Markets in the Southeast and Southwest - including Charleston, Austin, Greensboro, Charlotte, Jacksonville, Orlando, Phoenix and Las Vegas - have seen the strongest year-over-year increases in occupancy, with vacancy rates declining three to four percentage points over the past 12 months. Metros in Texas have all continued to outperform the market. Despite accounting for just 14 percent of total U.S. apartment inventory, Austin, Dallas, Fort Worth, Houston and San Antonio have accounted for nearly 21 percent of all U.S. absorption since the beginning of 2010.
Rent growth accelerated during the second quarter, with both asking rents - at $1,053 per unit - and effective rents - at $997 per unit - recording their strongest quarter-over-quarter increase since midyear 2008. The Bay Area has the strongest quarterly increases in effective rents, as below 4.0 percent vacancy rates in San Jose and San Francisco contributed to rent increases of 2.0 percent and 1.3 percent quarter-over-quarter. New York area markets, including Manhattan, Westchester, Long Island and Fairfield County, also saw notable gains in effective rents.
While demand continues to improve, supply remained limited, with only 15,760 units completed in the first half of 2011. Total construction completions for 2011 are expected to total just over 40,300 units, less than 50 percent of the 2010 total, and the lowest total of construction completions in more than a decade. Nearly one-third of all units under constructions are concentrated in Washington, D.C. and its surrounding areas or Austin, Dallas, Fort Worth, Houston and San Antonio in Texas.
Improving fundamentals have led to more access to financing for apartment sales transactions, which boosted investment volume in the second quarter of 2011. U.S. apartment sales totaled $22.9 billion for the first half of the year. In the second quarter alone, $13.9 billion in sales were completed, more than double the volume of second quarter 2010 and the highest quarterly total since the first quarter of 2008.
As competition among investors increases, attention has shifted outside of the New York and Washington, D.C. areas to markets including San Francisco, Boston and Chicago, where sales volume increased 450 percent in the first half of the year. Secondary markets including Atlanta, Oakland, Philadelphia, Northern New Jersey, Charlotte and Seattle have also seen volume increase by more than 200 percent.
"We expect strong demand from both tenants and investors to continue through the end of this year," said Steven Weilbach, senior managing director of Capital Markets and U.S. Multifamily Practice Leader for Cushman & Wakefield. "Looking forward, class B and C products will play larger roles in the big picture. Increasing rental rates for class A buildings will have tenants looking for less-expensive options, and investors with capital to spend will seek deals for alternative assets as demand for high-quality product remains highly competitive."
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