Apartment Boom Shows Signs of Cooling

October 5, 2015

The thriving apartment market may finally have reached its peak, according to new research by the firm Reis Inc. An increase in supply of multifamily units helped push nationwide vacancy rates up to 4.3 percent in the third quarter. About 200,000 additional rental units are expected to come onto the market this year and vacancy rates are expected to move higher in the coming quarters.

“I don’t think this is the death knell for the apartment market, but it is going to be more challenging over the next four to five years than it was over the last four to five,” says Ryan Severino, REIS’ senior economist.

But as the market cools, renters may not feel any relief with escalating rents anytime soon. Average effective rents increased 4.2 percent from the same quarter a year ago, reaching $1,166. That marks the first time since 2007 where rents have increased more than 4 percent.

Even as vacancies rise, rents can still continue to increase since new rental units tend to bring higher rents and can boost the average. Case in point, in San Jose, Calif., the vacancy rate increased from 2.7 percent in the previous quarter to 3.3 percent, but rents increased 8.5 percent to $2,023. The same was true in Seattle: Vacancy rates increased from 4.7 percent to 5.1 percent and rents also rose 8.5 percent to $1,299, according to Reis data.

But the increase in supply of multifamily units is prompting some landlords to start offering concessions to entice renters. For example, landlords with Urban Igloo, a rental real estate brokerage based in Washington, D.C., are reportedly offering several enticements to renters, from a couple of months free rent and free parking to Uber gift certificates.

“Eventually [landlords] have to drop rents to be competitive,” says Patrick Sprouse, director of sales at Urban Igloo.

Still, vacancy rates nationwide remain well-below historical averages of about 5.5 percent, according to Reis. But they are showing signs of climbing.

“This really looks like we’re at the inflection point where vacancies are going to start to head higher,” Severino says. He expects rent increases to begin to level off in 2017.

Source: “Apartment Market Boom Levels Out, Data Indicate,” The Wall Street Journal (Oct. 1, 2015)