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August 18, 2015
Vacancy Rates Fell Further, Now Near Historic Lows
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The U.S. Census Bureau’s apartment vacancy rate for all rental apartments (in buildings with 5 or more units) fell 20 basis points (bps) from the first quarter of 2015—and 80 bps from the second quarter of 2014—to 7.3 percent. This is the lowest vacancy rate Census has recorded for apartments since 2Q 1984. MPF Research’s national vacancy rate for investment-grade apartments fell 50 bps to 4.0 percent in 2Q 2015. This is 40 bps lower than in 2Q 2014 and the lowest quarter vacancy rate since 3Q 2006. The vacancy rate fell in all regions, and for the 33rd consecutive quarter, it was lowest in the Northeast (3.1 percent). The vacancy rate in the West was not much higher (3.4 percent); for the 34th straight quarter, it was highest in the South (4.9 percent).

Multifamily Permits Rose, While Starts and Completions All Rose

Multifamily permits (5+ units in structure) rose to a seasonally adjusted annual rate (SAAR) of 532,700 in the second quarter, a 34.4 percent increase from the previous quarter and an increase of 40.9 percent from a year ago. The bulk of the permits were issued in the Northeast, marking a shift from traditional patterns. Starts increased 32.0 percent from the previous quarter to a SAAR of 427,300. This was a 23.5 percent increase from a year ago. Completions rose 37.0 percent from the first quarter to 336,000 and by a sizable 44.8 percent from 2Q 2014. While at least a portion of the increase in permits and starts can be attributed to a rush to acquire permits and begin construction on projects in New York City in anticipation of an expiring credit, this was the highest second quarter completions number since 1989, signaling that new construction is now meeting the mid-range of the level needed every year (300,000 to 400,000 new units annually by NMHC estimates).


Multifamily Absorptions Increased in the Second Quarter

Net absorptions of investment-grade, market-rate apartments tracked by MPF Research totaled 109,089 in 2Q 2015. Although it was a big increase (142.4 percent) from the first quarter, the second quarter is generally the strongest quarter for lease-ups. Net absorptions were down 23.2 percent from the 141,958 units absorbed in 2Q 2014. The trailing four-quarter sum decreased 11.0 percent to 267,218 units from the first quarter but rose 9.0 percent from the 2Q 2014 level. This marks six consecutive quarters in which the trailing four-quarter sum was over 200,000.


Apartment Rents Continued to Increase

Apartment rents for professionally managed apartments tracked by MPF Research rose by a strong 4.9 percent in 2Q 2015, 40 bps higher than the first quarter and 150 bps higher than a year earlier. This is the highest second quarter increase since 2000 and is further evidence of tighter markets after 2013. Rents increased in all regions, with the West showing the biggest increase at 7.3 percent. Rents in the South, Midwest and Northeast all rose by 30 bps—to 4.1 percent in the South and to 3.0 percent in both the Midwest and Northeast. The CPI rent index, which covers all rental housing, rose 3.5 percent—the same as in the first quarter—and rose 40 bps from 2Q 2014.

Apartment Transaction Volumes Decreased

In the apartment transaction market tracked by Real Capital Analytics, sales volume decreased 11.4 percent from a strong first quarter volume to $29.7 billion. This represented a 12.8 percent increase year over year and marked the highest second-quarter sales volume on record (which begins in 2001). At $130.4 billion, the trailing four-quarter volume was also the highest on record. The market value of investment-grade apartments, as measured by the National Council of Real Estate Investment Fiduciaries (NCREIF), rose 1.8 percent from 1Q 2015 and 6.5 percent from a year ago. This is the largest gain since 4Q 2011. The NCREIF transactions-based index (TBI), which uses only transaction prices, not appraisal prices, increased 5.3 percent from the previous quarter and 9.2 percent from a year earlier. Cap rates remained unchanged at 6.0 percent from the first quarter of 2015, 20 bps lower than in 2Q 2014.

GSE Multifamily Mortgage Lending Rebounds Dramatically

After reaching an all-time high of $30.9 billion in 4Q 2014, net multifamily mortgage credit extended eased to $21.7 billion in 1Q 2015. That was still the strongest first quarter on record. Over the last 12 months combined (TTM), mortgage debt outstanding (MDO) grew by $83.8 billion, the biggest increase in seven years. Second quarter data on construction and transaction activity suggest the record TTM figure of $86.8 billion is likely to be surpassed. With this increased lending volume, Fannie Mae and Freddie Mac (GSE) lending has rebounded sharply. From mid-2014 to mid-2015, the GSEs’ MDO shrank by $6.0 billion. In the three quarters since then, GSE net lending increased by $26.5 billion, only a little less than depository institution volume (shown as “Banks” in the chart). The TTM figures show banks are still clearly the leading lenders, extending a net $38.0 billion in the four quarters ending in March. The GSEs moved back into second place. Ginnie Mae net lending contracted slightly in the first quarter, and its TTM volume decreased to $5.9 billion, the lowest in almost five years. On the other side of the ledger, CMBS net credit continued its decline, now for the 27th quarter.

About Market Trends
Market Trends is a high-level quarterly summary of key trends in the industry for apartment executives. Each issue features the latest data on demand and supply trends for apartment residences, along with vacancy rate, absorption and rent trends. In addition, coverage includes an overview of the apartment transaction market with data on apartment sales volume and pricing. Each issue also contains a special analysis of an important and timely trend.
Questions & Comments
Questions or comments on Research Notes should be directed to Mark Obrinsky, NMHC’s Senior Vice President of Research and Chief Economist, at mobrinsky@nmhc.org or 202/974-2329.
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