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Business & Finance

US apartment sector grows past recovery: report

NEW YORK : The US apartment market has recovered and is expanding, with vacancies expected to remain steady at 5.5 per
Published November 19, 2011

new-york-apartments_copyNEW YORK: The US apartment market has recovered and is expanding, with vacancies expected to remain steady at 5.5 percent in 2012 and then fall below pre-downturn levels, according to a CBRE Econometric Advisors (CBRE-EA) report released on Friday.

Apartments have been the best performers in US commercial real estate, with more Americans turning away from home ownership and choosing to rent instead. That has helped drive down the US apartment vacancy rate from 7.04 percent in 2009 toward the 5.3 percent rate seen before the US economic downturn, the forecasting unit of real estate services company CBRE Group Inc. said.

Rising demand and rent growth have attracted investors to the sector and sent prices for apartment buildings in some areas to new record highs.

"Multifamily housing is leading commercial real estate in terms of its recovery," Gleb Nechayev, senior managing economist of CBRE-EA, said. "It's actually not in recovery anymore. It entered the expansion phase, which means it's actually back to the normal vacancy levels."

Taking a pause in 2012, demand growth is anticipated to return in 2013 with the vacancy rate dipping to 5.2 percent despite more than 200,000 new units ready for occupancy next year. CBRE-EA sees the vacancy rate falling to 5.1 percent after that.

"The reason we expect improvement after 2012 is because that's when we also expect to see a more robust labor market, job growth," he said.

Jobs are one of the main drivers of apartment demand.

The unknown will be home ownership, which has been falling from a peak of 69 percent in 2004, Nechayev said, citing annual U.S. census data. The US home ownership rate fell to 65.1 percent last year, which was still above the 63.9 percent historical norm from 1960 through 2000.

If the trend continues, that could drive demand for rental units even more and send vacancy rates falling farther and more steeply.

"It's more of an unknown in a positive way," Nechayev said. "I don't think home ownership next year is likely to rise. It's likely to be flat or fall a little bit."

For the average landlord, the revenue generated by the surge in demand has already surpassed the pre-downturn levels. Revenue is expected to rise 3 percent next year, even with no growth in occupancy, according to CBRE-EA. That would be on top of an anticipated 4.1 percent rent increase for this year.

Rents vary by widely among markets. In some places, average rents are flat or slightly down and in others rents are rising by as much as 15 percent.

Over the next two years, metro areas such as San Francisco, San Jose, Austin, Denver and Seattle will be among the top-performing markets for rent and revenue growth, as the technology sector continues to drive job growth, Nechayev said.

Phoenix, one of the hardest-hit markets by the housing bust, is also expected to be among the top performers over a 2-year horizon, with demographic trends such as population growth work in its favor.

The top US markets, as measured by revenue, have long left the recovery mode and have surpassed pre-downturn levels. In Washington DC, the No. 1 US apartment market, average revenue is up 8 percent from pre-downturn levels and is expected to grow about 2.5 to 3 percent next year.

Boston and New York, tied for second place, are 4 percent ahead of pre-downturn levels. Boston is expected to see revenue up by a range of 4.5 to 5 percent, according to CBRE-EA. For New York, the most expensive US apartment market, CBRE-EA is eyeing revenue growth of 2.5 to 3 percent.

 

Copyright Reuters, 2011

 

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