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August 16, 2016
Vacancy Rates at Record Lows
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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 20 basis points (bps) in the second quarter of 2016–and 10 bps from 2Q 2015–to 7.2 percent. This was the lowest second quarter rate recorded by Census in 32 years.

MPF Research’s national vacancy rate for investment-grade apartments dropped 40 bps to 3.8 percent in 2Q 2016, a 20 bps decrease from a year earlier. By this measure, it was also the lowest vacancy rate seen in any second quarter in more than two decades.

This drop in vacancy rates spanned all U.S. regions, with the Midwest and South posting the steepest declines of 60 bps each, down to 3.4 percent and 4.4 percent vacancy, respectively. The Northeast and West both saw vacancy fall 30 bps to 3.2 percent and 3.3 percent from the first quarter, although the Northeast’s second quarter vacancy rate was 10 bps higher than a year ago.


Multifamily Starts, Completions and Permits Fell

Multifamily permits (5+ units in structure) fell to a seasonally adjusted annual rate (SAAR) of 373,300 in the second quarter, down 1.8 percent from last quarter and 30.1 percent from 2Q 2015. Starts decreased 10.7 percent from the previous quarter to a SAAR of 385,300, marking a similar year-over-year decrease of 11.1 percent. Completions fell 3.7 percent from 1Q 2016 to 303,000 (SAAR), down 9.6 percent from the previous year’s 26-year high-water mark.

Multifamily Absorptions Increased

Net absorptions of investment-grade, market-rate apartments tracked by MPF Research increased to 131,913 units, a pickup from the seasonally weak 30,153 units absorbed in the first quarter. The trailing four-quarter sum also increased 11.5 percent to 264,520 units from last quarter, while falling 1.4 percent from a year earlier. This is the tenth consecutive quarter in which the trailing four-quarter sum was over 200,000 units.

Apartment Rent Growth Moderated

Same-store apartment rents for professionally managed apartments tracked by MPF Research rose 4.5 percent year over year in 2Q 2016, a 50 bps deceleration from last quarter’s 5.0 percent growth and 40 bps lower than last year’s second quarter rent growth.

Both South and Midwest regions recorded 50 bps lower rent growth in 2Q 2016, while growth in the West tapered 90 bps from its historically high first quarter. The Northeast, on the other hand, was the sole region to post higher growth during 2Q 2016, increasing 20 bps to 2.3 percent.

The CPI rent index, which covers all rental housing, rose 3.8 percent during the second quarter, up 10 bps from last quarter and 30 bps from 2Q 2015. This marks the highest second quarter rent increase since 2007.


Apartment Market Values Rose

In the apartment transaction market tracked by Real Capital Analytics, sales volume decreased 16.8 percent from last quarter to $32.7 billion, still a 5.4 percent increase from the prior year. The trailing four quarter sum reached $159.4 billion, a new record.

The market value of investment-grade apartments, as measured by the National Council of Real Estate Investment Fiduciaries (NCREIF), rose 0.7 percent from 1Q 2016 and 4.9 percent from a year ago. The NCREIF transactions-based index (TBI), which uses only transaction prices, not appraisal prices, showed a 1.6 percent increase from a year earlier, despite recording a 1.0 percent decrease from the first quarter of 2016.

After posting a record low in the first quarter of 2016, cap rates fell further still this past quarter to 5.6 percent, the fourth consecutive quarter of below-6.0 percent cap rates.


Banks and GSEs Dominated the Multifamily Mortgage Market

After reaching an all-time high of $36.5 billion in 4Q 2015, net multifamily mortgage credit extended eased to $19.4 billion in 1Q 2016, still the second strongest first quarter on record. During the past 12 months combined (TTM), mortgage debt outstanding (MDO) grew $103.6 billion to a total of $1.1 trillion, an increase topped only by 4Q 2015 TTM growth of $105.0 billion.

Depository institutions (“Banks” in the chart) and the GSEs extended a net $19.8 billion in mortgage credit, while life insurance companies, Ginnie Mae and other lenders provided a net $5.3 billion. The combined subtotal was offset by a record decline of $5.7 billion in CMBS mortgage debt outstanding. The depository institution share of all mortgage debt outstanding now sits at a record high of 35.0 percent, while the 5.1 percent CMBS share is the lowest in almost 20 years. 

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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