Investors should expect “increasing distress” in the US apartment sector, Reis’s director of research, Victor Calanog, revealed in a conference call last week.
“Despite record [downward] figures in the past two quarters, we’re still seeing quarterly increases in vacancies and declines in asking and effective rents that exceed historic benchmarks,” Calanog said.
Although the second quarter is traditionally a strong leasing period for apartment properties, the national vacancy rate has risen to 7.6 percent, the highest level since Reis began researching the sector in 1987.
“It’s pretty sobering to see that more than two-thirds of new apartment buildings opened their doors in the first half of 2009 fifty percent vacant or higher,” Calanog said. “Unless we see household formation ramping up demand for rental units at a tremendous rate over the next 18 months, we are going to see vacancy levels rising past historic highs.”
The firm projects vacancy rates will peak at 8.1 percent in 2010, before beginning to decline in 2011.
In response to deteriorating occupancy levels, Calanog notes “by the second quarter of 2009…a clear majority, or 54 percent of apartment properties, have had to lower asking rents.”
Asking rents fell by 0.6 percent this quarter while effective rents fell by 0.9 percent. Effective rent has declined 2.6 percent so far in 2009, one of the worst figures seen since Reis began quarterly records in 1999.
With the completion of over 100,000 new rental units in 2009, the firm expects landlords will continue to lower both asking and effective rent prices in order to attract and maintain tenants.
“We don’t see clear signs that higher demand levels will soak up excess supply in the near term,” Calanog said.
“Slightly positive, but tepid asking rent growth resumes in 2010, but this assumes that the economy will recover in early 2010 at the latest,” he said.
Positive effective rent growth should resume in 2011, following a decline in vacancy rates.
Despite overall weakness, Calanog emphasized the need for detailed regional analysis when evaluating risks and opportunities. Although most submarkets followed metro level patters, there were notable exceptions.
In San Francisco’s Haight-Ashbury submarket, effective rents grew by 3 percent this quarter. Not too far away, in the Civic Centre downtown area, they fell by over 5 percent. Variations between submarkets can significantly affect metro level averages.