By George Ratiu, Research Economist

Broadstone Woodbridge in Wylie, TX

The economy concluded 2009 with a positive level of activity. Gross domestic product advanced at a better-than-expected 5.9 percent rate. Other economic indicators also pointed towards a continued recovery. At the same time, commercial real estate concluded the year with mixed results. Fundamentals remained weak, investments were down and the volume of distressed properties increased. Contracting credit and a tightened lending environment added to the pressure.
In the broad landscape of commercial properties, the multifamily sector has fared comparatively better. Demand for space was modest but positive. Net absorption closed the year at 105,458 units. Yet, there are factors which caused adverse impacts in the sector.
Household formation seems to be one of those factors. More precisely, the prolonged recession of the past two years has taken a toll on the number of people starting a household. Based on household formation data from the Census Bureau, the 10-year average of new households being formed has been 1.3 million per year. However, this number decreased significantly in both 2008 and 2009. From a decade-high of 3.5 million in 2001, household formation dropped to 772,000 in 2008 and only 398,000 in 2009.

Household Formation

It is not surprising that many people delay forming households considering the current employment environment. Except for a solitary 0.6% rise in November 2009, payroll employment has been declining for two years. Over this period, 8.4 million jobs have been cut, leading many job seekers into longer job searches, and causing others to discontinue their attempts altogether. The number of people receiving unemployment benefits reached the 4.6 million mark this past week.
In addition, the multifamily sector has experienced pressures from increased sales activity in residential housing. Growing foreclosures coupled with declines in values have prompted banks and homeowners to turn existing houses into rental properties, increasing rental supply. In addition, rising sales combined with lower housing formation have reduced demand for rental properties. Existing home sales rose during the second half of 2009, posting a strong performance during the fourth quarter. On a yearly basis, following a 7.0 percent decline in activity in the first quarter and a 2.9 slide during the second quarter, sales rebounded 5.7 percent in the third quarter and jumped 27.2 percent in the fourth quarter of the year.
Demand for apartments, as measured by net absorption, weakened in 2009. In the fourth quarter of the year, net absorption reached a modest 12,501 units. The first quarter 2010 is expected to see absorption at the 18,500 mark. Based on improved economic conditions, the sector is expected to provide a year of mixed performance.
On the supply side, the number of new units outpaced demand throughout 2009. For the year, there were 177,589 new apartment units completed. The number of completions is expected to decline noticeably in 2010. However, the high level of new space pushed vacancy rates higher. Apartment vacancy closed 2009 at 7.4 percent. Curtailing new construction is expected to moderate availability in 2010.

Multifamily Fundamentals

Regionally, a stronger economy and lower supply volume are keeping vacancy rates lower in certain metro areas. The lowest availability rate for the first quarter is in San Jose, followed by Pittsburgh and Washington, DC. Other markets with low rates are Northern New Jersey, Boston and San Diego.
At the top of the availability range, Jacksonville, Phoenix and Houston are posting vacancies of 12.3 percent, 11.3 percent and 11.0 percent, respectively. They are followed by Atlanta (10.5%), Fort Worth (10.3%), Dallas (10.0%) and Las Vegas (10.0%).
In light of growing vacancies, rent growth at the national level has been on a steady decline. After a 1.2 percent decline in the second and 1.3 percent in the third quarters, the fourth quarter posted a 1.0 percent decline in rent, closing the year with a 3.6 percent drop. Rent is projected to decline an additional 1.0 percent in the first quarter. For 2010, rent is expected to decrease 3.4 percent. While the apartment sector maintained more resiliency through the recession, it has not escaped unscathed.

Lowest Multifamily Vacancy Rates

Copyright National Association of REALTORS®, Reprinted with permission.

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