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February 18, 2016
Demand for Apartments Continues
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The U.S. Census Bureau’s apartment vacancy rate for all rental apartments (in buildings with five or more units) fell 90 basis points (bps) in the fourth quarter of 2015–and 70 bps from the fourth quarter of 2014 to 7.0 percent. This was the lowest fourth-quarter rate recorded by Census in 32 years.

MPF Research’s national vacancy rate for investment-grade apartments rose 30 bps to 4.1 percent in 4Q 2015, a 40-bps decrease from a year earlier and the lowest 4Q vacancy rate recorded since 2000. The vacancy rates ticked up slightly in all four regions but were also the lowest fourth quarter rates in 15 years.


Multifamily Permits Increased, Starts, Completions Fell

Multifamily permits (5+ units in structure) rose to a seasonally adjusted annual rate (SAAR) of 464,300 units in the fourth quarter, up 13.4 percent from last quarter and 16.9 percent from 4Q 2014. Permits totaled 456,625 for the year, the highest since 1986.

Starts decreased 10.4 percent from the previous quarter to a SAAR of 362,300 units, a year-over-year increase of 6.5 percent. Starts totaled 384,400 for all of 2015, the most since 1987.

Completions rose 17.1 percent from the year prior to 316,700 (SAAR), although they slid 5.8 percent from the third quarter’s historically high levels. At 308,300, completions last year were the highest since 1989.

Multifamily Absorptions Slowed During the Quarter

Net absorptions of investment-grade, market-rate apartments tracked by MPF Research decreased in the seasonally weak 4Q to 14,252, down from the 94,385 units absorbed in 3Q 2015. The trailing four-quarter sum fell 4.0 percent to 258,960 units from the third quarter and 15.3 percent from a year earlier. This marks eight consecutive quarters in which the trailing four-quarter sum was over 200,000.

Rent Growth Dipped, Rents Still Higher Than a Year Ago

Same-store apartment rents for professionally managed apartments tracked by MPF Research rose 4.8 percent in 4Q 2015, 80 bps lower than last quarter but 20 bps higher than a year earlier. For the year, rents rose at the highest rate since 2000.

All four regions recorded tapering in rent growth with the exception of the Midwest, which remained unchanged at 3.5 percent. The South’s rent growth of 4.1 percent, while 70 bps lower than the previous quarter, marked the highest 4Q rate for the region since 2000. Rents in the Northeast fell 50 bps to 3.3 percent, while rents in the West fell 140 bps to 6.6 percent.

The CPI rent index, which covers all rental housing, rose 3.7 percent—a 10 bps increase from the third quarter—and rose 30 bps from 4Q 2014. This is the highest 4Q rent increase since 2007.

Apartment Transaction Volumes Spiked

In the apartment transaction market tracked by Real Capital Analytics, sales volume increased 48.9 percent from last quarter and 43.3 percent from last year’s fourth quarter to $50.5 billion, the highest level reported since records began in 2001. For the year, transactions reached a new all-time high of $150.0 billion.

The market value of investment-grade apartments, as measured by the National Council of Real Estate Investment Fiduciaries (NCREIF), rose 1.6 percent from 3Q 2015 and 7.0 percent from a year ago. The NCREIF transactions-based index (TBI), which uses only transaction prices rather than appraisal prices, decreased 1.5 percent—although it was still standing at a 3.8 percent gain from a year earlier.

Cap rates fell slightly from the third quarter of 2015 to a record low of 5.8 percent.

Apartment Returns Exceeded Historical Averages

Strong property market fundamentals pushed apartment returns above historical averages last year. NCREIF reported that, on an unlevered basis, the total return for apartments was 12.0 percent, the highest in four years and well above the 20-year average of 9.8 percent.

Even so, apartment returns were below those of all other real estate asset types for the second straight year. This is largely a result of other asset classes “catching up,” as apartments recovered first.

NCREIF provides a second measure of returns using property appreciation measures only for properties that were bought and sold (that is, excluding appraisal estimates of increases in property values). In these transactions-based indexes (TBIs), apartment returns outpaced those for office and retail, but they trailed behind the returns for industrial properties. (There are not enough data to compute a TBI for hotels.)

Apartment REITs gained 16.5 percent in 2015, far more than all REITs combined (2.8 percent) and second only to the self-storage sector, which returned 40.7 percent. This was also far more than the total return for the S&P 500 of 1.4 percent. (Return calculations include both dividends and price appreciation.)

As is standard practice, all returns above are calculated nominally. Adjusting for inflation, the real NCREIF return for apartments in 2015 was 11.3 percent, while the real NAREIT return for apartment REITs was 15.8 percent.

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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