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November 8, 2018
Vacancy Measures Remain Mixed
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The U.S. Census Bureau’s apartment vacancy rate for all rental apartments (in buildings with 5 or more units) rose 40 basis points (bps) in the third quarter of 2018 to 8.8 percent, a 60 bps decrease from the third quarter of 2017.  
RealPage’s national vacancy rate for investment-grade apartments dropped 40 bps to 4.2 percent in the third quarter, leaving it 50 bps lower than the previous year’s third-quarter figure. This fall in vacancy rates spanned all regions but was most sizeable in the South, where rates dropped 50 bps to 4.8 percent. Rates in the Northeast and Midwest followed with a 40 bps decline each to 3.4 and 4.1 percent, respectively. The West saw the smallest reduction, with rates falling 30 bps to 3.7 percent.

Permits, Starts and Completions Decline

Multifamily permits (5+ units in structure) fell 9.5 percent from last quarter to a seasonally adjusted annual rate (SAAR) of 388,300 in 3Q 2018, 6.6 percent lower than 3Q 2017. Starts (5+) decreased 3.7 percent in the third quarter to a SAAR of 337,700 but were up 8.8 percent from the previous third quarter. 

Multifamily completions fell 17.2 percent from last quarter’s record high—but only 2.7 percent from 3Q 2017—to a SAAR of 318,300, marking the lowest level of completions since the third quarter of 2016. 

On a not seasonally adjusted basis, permit levels (2+ units in structure) fell in all regions for the third quarter. This pull back was most pronounced in the Northeast, which saw a 20.6 percent reduction in the number of permits issued from last quarter, and the West, with a similar 20.1 percent reduction. 


Multifamily Absorptions Remain Strong

Net absorptions of investment-grade, market-rate apartments tracked by RealPage fell to 104,492 in the third quarter—down from the 133,112 units absorbed in 2Q 2018. The trailing four-quarter sum, however, rose by 4.8 percent from 2Q 2018 to 321,529. This marks the fourth consecutive quarter in which the trailing four-quarter sum was over 300,000 and the largest fourth-quarter sum since 1Q 2011.

Rent Growth Picks Up

Same-store apartment rents for professionally managed apartments tracked by RealPage rose 3.0 percent in 3Q 2018, 50 bps above the previous quarter and still 30 bps higher than a year earlier. This marks the first quarter in which rent growth has hit 3 percent since 4Q 2016.

Rent growth remained greatest in the West, which saw rent growth of 3.6 percent in the third quarter, up 50 bps from the previous quarter but falling a slight 30 bps from a year ago. Rent growth in the South was up 40 bps from last quarter and 100 bps from a year ago. The Northeast and Midwest saw steady rent growth as well, with rates increasing 50 bps and 20 bps from last quarter, respectively. 

The CPI rent index, which covers all rental housing, rose 3.6 percent, the same amount as last quarter but down 20 bps from the third quarter of 2017.

Cap Rates Fall, Transactions Increase

In the apartment transaction market tracked by Real Capital Analytics, sales volume increased 33.7 percent from the previous quarter to $48.3 billion, up 14.2 percent from 3Q 2017.

The market value of investment-grade apartments, as measured by the National Council of Real Estate Investment Fiduciaries (NCREIF), rose 0.5 percent from 2Q 2018 and 2.0 percent from a year ago. The NCREIF transactions-based index (TBI), which uses only transaction prices, not appraisal prices, increased 4.0 percent from last quarter, while also showing a 4.3 percent increase from a year earlier. 

Cap rates dropped 20 bps to 5.4 percent in 3Q 2018, the lowest rate since records began in 2001.

Multifamily Loan Credit Quality Improves Again

Multifamily loan quality continued to improve in the second quarter of 2018. The share of noncurrent loans (more than 90 days past due) at all FDIC-insured institutions fell to a record low of 14 basis points (bps)—the eighth consecutive quarter in which the multifamily noncurrent rate set (or equaled) a new all-time low (these data go back to 1991). Most other real estate loan types also saw the noncurrent loan share edge down, though no other loan type registered a new record low. 

For acquisition, development and construction (ADC) loans, the noncurrent share was essentially flat, coming in at 48 bps (10 bps above its all-time low). The commercial (nonfarm, nonresidential) noncurrent loan share came in at 60 bps, while single-family loans (other than home equity lines of credit) had a noncurrent rate of 233 bps, still considerably elevated from the rates that prevailed before the bursting of the housing bubble. Home equity lines (HELs) of credit  had the highest noncurrent rate at 238 bps. The HEL noncurrent rate has only improved 50 bps in the present cycle, by far the lowest of any category of real estate loans.

Technical Note. Historical statistics from RealPage, Inc., reflect consolidation of records from the firm’s MPF Research and Axiometrics data sets into a single information source. While individual performance metrics such as monthly rent and net absorption shift to some degree, trends follow patterns reported previously. 

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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